SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-14108
360 COMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 47-0649117
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
8725 W. Higgins Road
Chicago, Illinois
60631-2702
(773) 399-2500
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b)of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, $0.01 par value New York Stock Exchange
Preferred Stock Purchase Rights Chicago Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
On March 27, 1998, 121,333,114 shares of the registrant's Common Stock
were outstanding. The aggregate market value on March 27, 1998 of the
registrant's Common Stock held by non-affiliates of the registrant was
$3,685,493,337.
Documents Incorporated by Reference
Certain portions of the registrant's definitive proxy statement for the
annual meeting of shareowners to be held on May 12, 1998 are incorporated by
reference in Part III of this Form 10-K.
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business..............................................................1
Item 2. Properties...........................................................18
Item 3. Legal Proceedings....................................................19
Item 4. Submission of Matters to a Vote of Security Holders..................20
Item 4a. Executive Officers of the Registrant.................................20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..............................................................22
Item 6. Selected Consolidated Financial Data.................................24
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................25
Item 8. Financial Statements and Supplementary Data..........................35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................59
PART III
Item 10. Directors and Executive Officers of the Registrant...................60
Item 11. Executive Compensation...............................................60
Item 12. Security Ownership of Certain Beneficial Owners and Management.......60
Item 13. Certain Relationships and Related Transactions.......................60
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....63
When used in this Report, the words "intends," "expects," "plans,"
"estimates," "projects," "believes," "anticipates," and similar expressions
are intended to identify forward-looking statements. Specifically,
statements included in this Report that are not historical facts, including
statements about the Company's beliefs and expectations about continued
market and industry growth, and ability to maintain existing churn,
customer growth and increased penetration rates, are forward-looking
statements. Such statements are subject to risks and uncertainties that
could cause actual results or outcomes to differ materially. Such risks and
uncertainties include, but are not limited to, the degree to which the
Company is leveraged and the restrictions imposed on the Company under its
existing debt instruments that may adversely affect the Company's ability
to finance its future operations, to compete effectively against better
capitalized competitors and to withstand downturns in its business or the
economy generally; the continued downward pressure on the prices charged
for cellular equipment and services resulting from increased competition in
the Company's markets; the lack of assurance that the Company's ongoing
network improvements and scheduled implementation of digital technology in
its markets will be sufficient to meet or exceed the capabilities and
quality of competing networks; the effect on the Company's operations and
financial performance of changes in the regulation of cellular activities;
the degree to which the Company incurs significant costs as a result of
cellular fraud; a significant delay in the expected closing of the proposed
merger between the Company and ALLTEL Corporation; and the other factors
discussed in the Company's filings with the Securities and Exchange
Commission, including the factors discussed under the heading "Certain Risk
Factors" in the Information Statement set forth as Exhibit 99 to the
Company's Form 10 (File No. 1-14108), which section is hereby incorporated
by reference herein. Forward-looking statements included in this Report
speak only as of the date hereof and the Company undertakes no obligation
to revise or update such statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
i
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TERMS
Certain terms used herein are defined as follows.
Airtime: The total time that a cellular telephone channel is occupied
including call time and tear-down time.
Analog: Transmission method employing a continuous (rather than pulsed or
digital) electrical signal that varies in amplitude or frequency in response to
changes in sound, light or position.
Bandwidth: Difference between the top and bottom limiting frequencies of a
continuous frequency band. Also indicates the information-carrying capacity of a
channel. FCC-licensed cellular operators have been allocated a continuous 25 MHz
bandwidth in the 850-900 MHz band.
Broadband PCS: The type of FCC license awarded in the PCS auctions in the
1850-1990 MHz band.
BTA: One of the 493 Basic Trading Areas, which are smaller than MTAs, into
which the licensing for broadband PCS has been divided based on the geographic
divisions in the 1992 Rand McNally Commercial Atlas & Marketing Guide.
Caller Line ID: A call management feature that displays the phone number of
the incoming caller on the cellular telephone handset.
CDMA: Code Division Multiple Access digital technology. Technique that
spreads a signal over a frequency band that is larger than the signal to enable
the use of a common band by many cellular signals and to achieve signal security
and privacy.
Cell site: The entire infrastructure and radio equipment associated with a
cellular transmitting and receiving station, including the land, building,
tower, antennas and electrical equipment.
Cell splitting: Dividing a single cell into a number of smaller cells
served by lower tower transmitters, thereby increasing the ability to reuse
frequency and the number of calls that can be handled in a given area.
Churn: The rate of customer defection, typically expressed as a percentage
of the total customer base.
Cluster: A group of contiguous markets, the provision of which facilitates
wide areas of uninterrupted cellular service, reduced airtime rates, automatic
delivery of inbound calls and simplified dialing patterns.
Communications Act: The Communications Act of 1934, as amended.
Controlled markets: Markets in which the Company's ownership percentage is
50% or greater.
Digital: Transmission system in which information is transmitted in a
series of pulses.
ESMR: Enhanced Specialized Mobile Radio communications services, supplied
by converting analog SMR services into an integrated, digital transmission
system providing for call hand-off, frequency reuse and wide call delivery
networks.
ii
<PAGE>
FAA: The United States Federal Aviation Administration.
FCC: The United States Federal Communications Commission.
FCC Rules: The rules promulgated by the FCC governing the construction and
operation of cellular communications systems and licensing and technical
standards for the provision of cellular communications service.
Market: An MSA or RSA.
Message Retrieval Service: An enhanced call management feature which
notifies the cellular customer that a
voicemail message is waiting.
MSA: One of the Metropolitan Statistical Areas for which the FCC licensed
cellular communications systems.
MSC: A mobile switching center, through which cell sites are connected to
the local landline telephone network.
MTA: One of the 51 Major Trading Areas into which the licensing for
broadband PCS has been divided based on the geographic divisions in the 1992
Rand McNally Commercial Atlas & Marketing Guide.
N-AMPS: Narrowband Advanced Mobile Phone Service, an enhanced analog
technology providing a three-fold capacity increase over conventional analog
technology.
Net POPs: The estimated population with respect to a given service area
multiplied by the percentage interest that the Company owns in the entity
licensed by the FCC to operate a cellular communications system within that
service area.
Non-wireline license: The license for a market initially awarded to a
company or group that was not affiliated with a local landline telephone carrier
in such market.
PCS: Personal Communications Services. PCS is the term commonly used to
describe the services offered by the companies that acquired PCS licenses.
Penetration rate: Customers divided by POPs in a given area.
POPs: The estimate of the 1996 population of a MSA or RSA, as derived from
the 1996 population estimates prepared by Claritas Inc.
RBOCs: The Regional Bell Operating Companies.
Reseller: A company that provides cellular service to customers but does
not hold a FCC cellular license or own cellular facilities. A reseller buys
blocks of cellular telephone numbers from a licensed carrier and, in turn, sells
service through its own distribution network to the public.
Roaming: The ability of the Company's customers to make or receive calls
when traveling in another wireless communications company's system and vice
versa.
iii
<PAGE>
Roaming agreements: Agreements entered into with other domestic wireless
communications companies that allow the Company's customers to make or receive
calls when traveling in another wireless communications company's system and
vice versa.
RSA: One of the Rural Service Areas for which the FCC licensed cellular
communications systems.
Service area: An MSA or RSA.
SMR: Specialized Mobile Radio communications services.
SuperNet: A product offered by the Company which provides seamless hand-off
from the Company's network to a neighboring cellular network and automatic
delivery of inbound calls to the neighboring market. SuperNet is a registered
service mark.
Voice-activated dialing: A feature which allows customers to place a call
by speaking aloud the telephone number they wish to dial.
Wireline license: The license for a market initially awarded to a company
or group that was affiliated with a local landline telephone carrier in such
market.
iv
<PAGE>
PART I
Item 1. Business.
General
360 Communications Company is one of the leading and most established
wireless communications companies in the United States. As of December 31, 1997,
the Company served approximately 2.6 million customers in over 100 markets in 15
states throughout the country. The Company's interests in these markets
represent approximately 21.4 million Net POPs as of December 31, 1997. The
Company also owns, as of December 31, 1997, minority interests in 60 additional
cellular telephone markets representing approximately 4.7 million Net POPs,
including the New York, New York; Chicago, Illinois; Houston, Texas; and
Orlando, Florida MSAs. The Company sells and markets wireless voice and data
services and related products, as well as residential long distance and paging
services, through a distribution network consisting of nationally recognized and
local dealers, full service retail stores and a direct sales force. As used
herein, the term "Company" means 360 Communications Company and its
subsidiaries, unless the context indicates otherwise.
The Company operates in four regions in the United States: Mid-Atlantic,
Midwest, Southeast and West. The Company's controlled markets comprising each
region include a number of geographic operating clusters which are primarily
located in mid-sized communities.
For the period from January 1, 1990 to December 31, 1997, the Company grew
its customer base by a compounded annual growth rate of 48%. At December 31,
1997, the Company had a cellular penetration rate of 10.7% in the markets that
it controlled. At December 31, 1997, the Company reached 20% penetration in six
markets and 15% penetration in eight additional markets. For the year ended
December 31, 1997, the Company's average monthly churn rate was 1.88%.
The Company was incorporated in October 1982 under the laws of the State of
Delaware by Centel Corporation. The Company, then known as Centel Cellular
Company, received its first operating license from the United States Federal
Communications Commission ("FCC") in 1985. Over the next three years, the
Company received additional licenses to operate wireline systems in 19 small and
medium-sized metropolitan areas, including MSAs in Las Vegas, Nevada;
Greensboro, North Carolina; and Tallahassee, Florida. In 1988, the Company's
aggressive expansion effort included the acquisition of United TeleSpectrum,
Inc. from Sprint Corporation ("Sprint"). Valued at more than $750 million, the
acquisition more than doubled the size of the Company, adding approximately 7.9
million Net POPs and making it the second largest domestic cellular company at
that time in terms of the number of markets served. On March 9, 1993, Centel
Corporation, then the Company's immediate parent, merged with a wholly owned
subsidiary of Sprint, and the Company changed its name to Sprint Cellular
Company. In February 1996, the Company changed its name to 360 Communications
Company. On March 7, 1996, Sprint completed the spinoff of the Company through a
pro rata distribution to Sprint shareholders of all of the Common Stock, $0.01
par value (the "Common Stock"), of the Company (the "spinoff").
Merger Agreement with ALLTEL Corporation
On March 16, 1998, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with ALLTEL Corporation, a Delaware corporation
("ALLTEL"), and Pinnacle Merger Sub, Inc., a Delaware corporation and a wholly
owned subsidiary of ALLTEL ("Merger Sub"), pursuant to which Merger Sub will
merge with and into the Company (the "Merger"). As a result of the Merger, (a)
each outstanding share of the Company's Common Stock (other than shares owned by
ALLTEL or Merger Sub or held by the Company), will be converted into the right
to receive .74 shares of the common stock, par value $1.00 per share, of ALLTEL
and (b) the Company will become a wholly owned subsidiary of ALLTEL.
1
<PAGE>
Consummation of the Merger is subject to certain conditions, including the
approval of the Merger by the respective shareowners of the Company and ALLTEL
and the receipt of required regulatory approvals, including the approval of the
Federal Communications Commission and the expiration of the applicable waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended. Pending the receipt of such approvals, the Company expects to complete
the Merger in the third quarter of 1998. The Merger Agreement may be terminated
under certain circumstances relating to a third party offer to acquire the
Company, in which event the Company will be obligated to pay to ALLTEL a
termination fee of $100 million (the "Termination Fee").
Concurrently with the execution of the Merger Agreement, the Company and
ALLTEL entered into a Stock Option Agreement (the "Stock Option Agreement")
whereby the Company granted to ALLTEL an option (the "Option") to purchase up to
19.9% of the number of shares of the Company's Common Stock issued and
outstanding immediately prior to the grant of the Option (approximately
24,140,553 shares) at an exercise price of $33.90 per share (subject to
adjustment in certain circumstances). The Option is exercisable by ALLTEL only
in the event that ALLTEL becomes entitled to receive the Termination Fee.
Concurrently with any exercise of the Option, the Company has the option to
repurchase from ALLTEL, at a price of $35.90 per share, any shares issued upon
the exercise of the Option.
The foregoing descriptions of the Merger Agreement and the Stock Option
Agreement, and the transactions contemplated thereby, do not purport to be
complete and are qualified in their entirety by reference to the Merger
Agreement and the Stock Option Agreement, copies of which are incorporated by
reference herein as Exhibits 2.4 and 2.5, respectively, to this Report.
Growth and Operating Characteristics of the United States Cellular Industry
The United States cellular telephone industry historically has operated as
a regulated duopoly. The industry, however, is changing as a result of the
emergence of new wireless competitors, such as PCS licensees. See
"Business-Governmental Regulation-Regulation and Licensing of Cellular
Communications Systems" and "Business-Competition." For the year ended December
31, 1997, the cellular industry reported total revenues of $27.5 billion versus
$23.6 billion in 1996. The total number of cellular customers grew by 25.7%
during 1997, expanding the customer base from an estimated 44.0 million to an
estimated 55.3 million customers. The cellular industry's penetration rate as of
December 31, 1997, was 20.6% for carriers on a nationwide basis, or 10.3% for
the average carrier on a nationwide basis.
The industry's rapid growth has been aided by vigorous competition and
rapid technological advancement. Industry growth has also been aided by
nationwide roaming agreements which have made it possible for customers to use
their cellular telephones nearly everywhere in the United States. This ubiquity
of service is one of the industry's greatest strengths. While industry growth
continues to be strong, average revenue per customer has declined consistently.
This trend is indicative of the industry's penetration of consumer markets as
well as competitive pressures on airtime rates.
2
<PAGE>
The following table sets forth certain domestic cellular industry
statistics published by the Cellular Telecommunications Industry Association as
of December 31, and for each of the five years in the period ended December 31,
1997.
December 31,
-------------------------------------------
Cellular Industry Statistics 1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Total Service Revenues
(dollars in billions) $27.5 $23.6 $19.1 $14.2 $10.9
Cellular Customers
(millions) 55.3 44.0 33.8 24.1 16.0
Customer Growth
(year-over-year) 25.7% 30.0% 40.0% 50.8% 45.1%
Average Monthly Bill per
Customer (dollars) $42.78 $47.70 $51.00 $56.21 $61.49
Penetration-Average
Carrier* 10.3% 8.3% 6.5% 4.7% 3.1%
- ---------------------------
* Represents the total nationwide cellular penetration for the average
carrier.
In March 1995, the FCC commenced its licensing of Personal Communications
Services ("PCS") by completing the auctioning of two 30 MHz licenses in each of
51 MTAs. Since that time, the FCC has auctioned an additional 60 MHz of spectrum
(three 10 MHz BTA licenses and one 30 MHz BTA license) for such potential
licensees. Licenses for all six spectrum blocks have now been issued. PCS is the
term commonly used to describe the services that will be offered by the
companies that acquired licenses in the FCC auctions. The FCC has limited the
amount of PCS spectrum which current cellular carriers (and other commercial
mobile radio service licensees) can obtain within their service areas. As a
result, in addition to the two cellular carriers, an additional three to six PCS
providers could compete in any given service area.
Despite the fact that PCS licensees compete directly with the Company, the
Company believes that the existence of new competitors and increased capacity
should change the existing competitive dynamics of the industry by significantly
increasing penetration rates and the overall size of the market for wireless
communications services. The Company believes that the entrance of new
competitors caused cellular growth to accelerate in other telecommunications
markets. The United Kingdom wireless market, for example, experienced increased
cellular growth rates following the introduction of PCS services. See
"Business-Competition."
3
<PAGE>
Markets and Clusters
The following table sets forth as of December 31, 1997 (i) the markets in
which the Company owns an interest in a cellular system by region and by
cluster, (ii) the wireline or non-wireline nature of the market, (iii) the total
population of the market (as derived from 1996 population estimates prepared by
Claritas Inc.), (iv) the Company's ownership percentage of the system, and (v)
the Company's Net POPs based on its ownership percentage:
<TABLE>
<CAPTION>
Wireline Total Ownership
CONTROLLED MARKETS Non-wireline Population Percentage Net POPs
- ------------------ ------------ ---------- ---------- --------
<S> <C> <C> <C> <C>
Mid-Atlantic Region:
Central Virginia Cluster:
Charlottesville, VA WL 143,749 100.0% 143,749
Danville, VA WL 110,259 75.0 82,694
Lynchburg, VA WL 158,437 100.0 158,437
Virginia RSA 4B2 WL 105,996 100.0 105,996
Virginia RSA 6B2 WL 13,578 100.0 13,578
Virginia RSA 7B2 WL 50,873 100.0 50,873
Virginia RSA 11B2 WL 42,970 100.0 42,970
Pennsylvania Cluster:
Harrisburg, PA WL 499,994 100.0% 499,994
York, PA WL 450,097 100.0 450,097
Lancaster, PA WL 449,868 100.0 449,868
Altoona, PA WL 132,079 100.0 132,079
Johnstown, PA WL 238,787 100.0 238,787
Pennsylvania RSA 3B1 WL 37,517 100.0 37,517
Pennsylvania RSA 4B1 WL 29,860 100.0 29,860
Pennsylvania RSA 8 WL 406,342 100.0 406,342
Pennsylvania RSA 10B1 WL 142,030 100.0 142,030
Pennsylvania RSA 11B1 WL 21,776 100.0 21,776
Pennsylvania RSA 12 WL 117,171 100.0 117,171
Scranton/Wilkes-Barre WL 659,594 78.9 520,947
State College WL 131,792 100.0 131,792
Williamsport WL 121,493 100.0 121,493
Eastern Virginia Cluster:
Norfolk-VA Beach-Portsmouth, VA NWL 1,048,667 100.0% 1,048,667
Newport News-Hampton, VA NWL 4 80,498 100.0 480,498
Petersburg-Colonial Heights-Hopewell, VA NWL 136,960 73.9 101,292
Virginia RSA 8 NWL 83,244 100.0 83,244
Virginia RSA 9 NWL 87,605 100.0 87,605
Tri-Cities Cluster:
Johnson City-Kingsport-Bristol, TN WL 456,168 100.0% 456,168
Tennessee RSA 4B1 WL 128,224 100.0 128,224
Tennessee RSA 8 WL 16,452 100.0 16,452
Virginia RSA 1 WL 145,678 100.0 145,678
Virginia RSA 2 WL 136,224 71.3 97,073
---------- ---------
Total Region 6,783,982 6,542,951
---------- ---------
Midwest Region:
Eastern Iowa Cluster:
Cedar Rapids, IA WL 180,058 100.0% 180,058
Waterloo-Cedar Falls, IA WL 146,645 88.5 129,842
Iowa City, IA WL 101,682 100.0 101,682
Dubuque, IA WL 88,756 85.0 75,443
</TABLE>
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<TABLE>
<CAPTION>
Wireline Total Ownership
Non-wireline Population Percentage Net POPs
------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
Central Illinois Cluster:
Peoria, IL WL 344,465 100.0% 344,465
Illinois RSA 5B1 WL 11,562 100.0 11,562
Northern Indiana Cluster:
South Bend-Mishawaka, IN WL 303,760 100.0% 303,760
Elkhart-Goshen, IN WL 167,253 100.0 167,253
Indiana RSA 2 WL 171,812 75.0 128,859
Northwestern Ohio Cluster:
Toledo, OH WL 792,921 85.1% 674,776
Lima, OH WL 221,480 85.1 188,479
Ohio 1 Williams County WL 127,464 100.0 127,464
Ohio RSA 2B1 WL 206,685 67.5 139,452
Ohio RSA 5 WL 235,219 68.3 160,770
Mansfield, OH WL 128,300 100.0 128,300
Ohio RSA 6 WL 450,273 82.5 371,359
Eastern Ohio Cluster:
Youngstown-Warren, OH WL 491,908 96.9% 476,477
Sharon, PA WL 122,370 96.9 118,531
Ohio RSA 11 WL 112,518 100.0 112,518
Pennsylvania RSA 1 WL 197,624 80.0 158,099
Pennsylvania RSA 6B1 WL 227,798 57.1 130,141
Ohio/Kentucky/WV Cluster
Charleston, WV WL 256,504 85.0% 218,028
Huntington-Ashland WL 317,680 100.0 317,680
Ohio 7B2 WL 170,742 100.0 170,742
Ohio 10B2 WL 111,865 100.0 111,865
Parkersburg-Marietta WL 158,115 100.0 158,115
Stuebenville-Weirton WL 139,291 100.0 139,291
West Virginia 6 WL 185,822 100.0 185,822
Wheeling WL 157,197 100.0 157,197
---------- ---------
Total Region 6,327,769 5,688,030
---------- ---------
Southeast Region:
North Carolina Cluster:
Fayetteville, NC WL 291,322 92.0% 268,083
North Carolina RSA 5B2 WL 35,403 100.0 35,403
North Carolina RSA 6 WL 157,106 100.0 157,106
North Carolina RSA 11 WL 223,100 100.0 223,100
Greensboro-Winston Salem-High Point, NC WL 983,707 61.8 608,249
Hickory, NC WL 237,102 100.0 237,102
North Carolina RSA 2B2 WL 74,023 100.0 74,023
North Carolina RSA 15B1 WL 193,617 67.0 129,685
Raleigh-Durham, NC WL 827,723 92.0 761,694
Burlington, NC WL 115,453 92.0 106,243
North Carolina RSA 7 (B1 and B2) WL 283,430 100.0 283,430
North Carolina RSA 8 WL 287,499 100.0 287,499
North Carolina RSA 9 WL 119,126 100.0 119,126
North Carolina RSA 10 WL 281,768 100.0 281,768
North Carolina RSA 14 WL 240,647 100.0 240,647
Wilmington, NC WL 202,394 100.0 202,394
Jacksonville, NC WL 145,653 100.0 145,653
North Carolina RSA 12 WL 128,210 100.0 128,210
North Carolina RSA 13 WL 239,785 100.0 239,785
</TABLE>
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<TABLE>
Wireline Total Ownership
Non-wireline Population Percentage Net POPs
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Charleston Cluster:
Charleston-North Charleston, SC WL 526,281 75.0% 394,763
South Carolina RSA 4 WL 212,463 50.0 106,232
South Carolina RSA 5 WL 243,529 50.0 121,765
South Carolina RSA 6 WL 195,183 50.0 97,592
South Carolina RSA 8 WL 173,664 50.0 86,832
Greenville Cluster:
Greenville-Spartanburg, SC WL 686,113 89.2% 611,807
Anderson, SC WL 155,628 89.2 138,773
South Carolina RSA 1 WL 61,928 100.0 61,928
South Carolina RSA 2 WL 227,027 50.0 113,514
Florida Cluster:
Ft. Walton Beach, FL WL 167,808 100.0% 167,808
Florida RSA 10 WL 112,525 100.0 112,525
Panama City, FL WL 145,363 100.0 145,363
Tallahassee, FL WL 278,223 100.0 278,223
Florida RSA 8B1 WL 46,924 100.0 46,924
----------- ----------
Total Region 8,299,727 7,013,249
----------- ----------
West Region:
Central Texas Cluster:
Killeen-Temple, TX WL 300,940 66.9% 201,389
Waco, TX WL 200,740 66.9 134,335
Texas RSA 9B3 WL 29,663 70.0 20,762
Texas RSA 10 (B2 and B4) WL 190,679 75.0 143,009
Texas RSA 15B1 WL 90,377 100.0 90,377
East Texas Cluster:
Tyler, TX WL 162,194 60.0% 97,316
Longview-Marshall, TX WL 169,960 60.0 101,976
Texas RSA 7B2 WL 44,358 97.5 43,249
New Mexico Cluster:
New Mexico RSA 1 NWL 257,276 100.0% 257,276
New Mexico RSA 2 NWL 23,796 100.0 23,796
New Mexico RSA 4 NWL 263,381 100.0 263,381
New Mexico RSA 5 NWL 59,226 100.0 59,226
Las Vegas, NV WL 1,018,224 72.2 735,220
----------- ----------
Total Region 2,810,814 2,171,312
----------- ----------
Total Controlled Markets 24,222,292 21,415,540
=========== ==========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Total Ownership
NON-CONTROLLED MARKETS* Population Percentage Net POPs
- ----------------------- ---------- ---------- ----------
<S> <C> <C> <C>
New York, NY-Long Branch-New Brunswick, NJ 16,394,955 10.0% 1,639,496
Chicago-Aurora/Elgin-Joliet-Kankakee, IL-Gary, IN 8,413,093 5.0 420,655
Houston-Beaumont-Galveston/Texas City, TX 4,595,807 8.8 403,052
Kansas City-Lawrence, KS 1,617,578 19.0 307,340
Orlando-Melbourne-Daytona Beach, FL 2,405,918 24.6 591,615
Richmond, VA** 802,859 24.6 197,423
Omaha, NE 630,141 27.9 175,809
Cleveland-Akron-Canton-Lorain, OH-Erie, PA 3,495,249 3.5 122,334
Allentown-Bethlehem-Easton, PA 714,126 20.8 148,324
Ft. Wayne, IN 437,208 25.0 109,302
Virginia RSA 10 233,327 33.0 76,998
Cincinnati-Dayton-Columbus, OH 3,680,472 1.2 44,166
Illinois RSA 3** 203,087 18.1 36,835
Illinois RSA 2B2 81,146 40.0 32,458
Texas RSA 7B1 126,305 25.0 31,576
Texas RSA 11B2** 107,932 28.0 30,221
Indiana RSA 3 146,081 20.0 29,216
Pennsylvania RSA 4B2 68,489 50.0 34,245
Reading, PA 351,468 15.9 55,708
St. Joseph, MO 98,084 20.0 19,617
Florida RSA 9** 40,388 49.0 19,790
Pennsylvania RSA 3B2 59,328 61.5 36,505
Missouri RSA 4 69,073 12.5 8,634
Iowa RSA 16 104,124 8.3 8,674
Iowa RSA 5*** 108,984 7.1 7,781
Austin, TX 940,500 0.8 7,712
Missouri RSA 9B1 34,669 19.6 6,795
Missouri RSA 1 42,617 14.3 6,086
Iowa RSA 14 107,028 5.6 5,951
Iowa RSA 15 83,766 6.7 5,587
Iowa RSA 1 62,300 3.9 2,430
Iowa RSA 8 54,521 2.3 1,253
Pennsylvania 5** 82,527 40.0 33,011
Hartford/New Britain/Bristol, CT. 1,112,760 0.1 1,652
Bridgeport/Stamford/Norwalk, CT 830,330 0.1 1,233
New Haven/West Haven, CT 791,830 0.1 1,176
Springfield/Chicopee/Holyoke, MA 591,653 0.1 879
New London/Norwich, CT 248,221 0.1 369
Connecticut #1 180,107 0.1 267
Connecticut #2 104,079 0.1 155
Massachusetts #1 70,685 0.1 105
---------- ----------
Total Non-Controlled Markets 50,322,815 4,662,435
---------- ----------
Total Company Markets 74,545,107 26,077,975
========== ==========
- --------------------
<FN>
* All non-controlled markets are wireline systems.
** Represents non-controlled markets that are managed by the Company on a
day-to-day basis.
*** The Company manages the Jones County, IA portion of the market only.
</FN>
</TABLE>
7
<PAGE>
Business Strategy
The Company intends to maintain its strong revenue growth and improvement
in operating margins by continuing to add customers and increase minutes of use
per customer. The Company believes that its primary growth will be internally
generated through the implementation of its operating strategies as described
below. In addition, a key part of the Company's growth strategy is to pursue
favorable opportunities to expand its regional market clusters or develop new
strategic market clusters through acquisitions, trades or alliances with other
cellular carriers. The principal components of the Company's strategy to achieve
these objectives are as follows:
exceptional localized customer service provided by highly motivated,
experienced and trained customer relations personnel who are focused on
satisfying customer needs to build loyalty, improve customer retention
and increase usage;
aggressive distribution management to provide effective and extensive
marketing of products and services through dealers, Company retail
stores, Company retail kiosks and a direct sales force targeted at high
volume users;
integration of multiple telecommunications services such as cellular,
residential long distance and paging into a single product offering,
including one bill, to improve customer retention and to increase sales
and usage of all services offered by the Company;
continuous network improvement to meet customer expectations and to
provide minutes of use at lower costs through deployment of CDMA
digital service;
clustering of markets to provide broad areas of uninterrupted service
combined with simplified calling and pricing patterns and operating
efficiencies through economies of scale; and
targeted product and service deployment and pricing strategies to
introduce new features and network solutions to stimulate increased
usage, augment revenue per customer, and improve customer satisfaction
and retention.
The Company believes that the strategies employed to meet existing
competition will also be effective in competing against new service providers.
Companies with PCS licenses currently offer their products and services in
markets that represent about 50% of the Company's total POPs. The Company has
prepared for this competitive environment by enhancing its networks, expanding
its service territory, offering new features, products and services to its
customers and simplifying its pricing of services. In addition, the Company
intends to further capitalize on its incumbent position as a leading wireless
provider in its markets by increasing revenues through customer acquisition,
selling into its existing customer base based on segmentation data, further
improving localized customer service and enhancing its financial performance by
continuing to improve operating margins.
Recent Acquisitions
During the second quarter of 1997, the Company and BellSouth Corporation
("BellSouth") combined their interests in two partnerships that own and control
cellular licenses and operations in Richmond, Virginia, and Orlando, Florida.
The resulting partnership is owned approximately 75% by BellSouth and 25% by the
Company, with the Company assuming management responsibilities of the cellular
operations in Richmond. In connection with this transaction, the Company
contributed $80 million to the resulting partnership. Also in 1997, the Company
acquired minority interests in 15 of its controlled markets, which increased its
ownership interest to 100% in 10 of those markets.
8
<PAGE>
The Company constantly evaluates opportunities to increase its ownership
interests in the markets in which it operates. To the extent feasible, the
Company will explore opportunities to exchange some or all of its minority
investments in cellular communications systems for increased ownership interests
in markets it currently controls or for ownership interests in new markets in
which it could obtain control.
Network Improvement
Network quality is a key factor in retaining customers and generating
revenue, and is generally viewed as a critical competitive factor in the
cellular marketplace. Customers expect their cellular telephones to deliver
ubiquitous coverage, clarity and reliability. The Company continually improves
its systems with the goal of providing network service comparable to that of
local telephone companies. The Company believes that the quality and reliability
of its network significantly exceeds competitors' standards.
The Company believes its quality and reliability, as well as its broad
network coverage, result from an integrated process of network planning,
aggressive cell site construction and rigorous system maintenance. The Company
had over 1,600 cell sites in service as of December 31, 1997 and approximately
400 of the Company's employees are engaged in engineering or network
maintenance. In addition, to ensure reliable network performance, the Company
monitors each cellular market's network twenty-four hours a day from its Chicago
network operations center. The Company will continue to stress high quality
portable telephone coverage and the integrity of data transmissions.
The Company was the first cellular carrier to employ Narrowband Advanced
Mobile Phone Service ("N-AMPS"). This enhanced analog technology, first offered
in the Company's Las Vegas market, provides a three-fold capacity increase over
conventional analog technology. N-AMPS technology has since been deployed in ten
additional high- traffic markets, serving as an intermediate step to the
implementation of digital technology. The Company has sold N-AMPS capable
telephones in all of its markets since 1991 in anticipation of the deployment of
N-AMPS technology, allowing the migration to N-AMPS to be indiscernible to
customers.
The Company believes that its networks have sufficient capacity to handle
the Company's customer growth rate in the near term. In the future, the Company
intends to meet any capacity requirements through frequency planning, network
optimization and the deployment of additional network infrastructure. The
Company plans to accelerate its transition to digital technology on a
market-by-market basis to provide more minutes of use to customers at a lower
cost per minute.
In August 1996, the Company began offering Code Division Multiple Access
("CDMA") digital technology in Las Vegas, Nevada. The introduction of CDMA in
Las Vegas followed a six-month trial that began in early 1996. The Company
currently believes that CDMA technology will offer a 6 to 10 fold call-carrying
capacity increase over conventional analog technology. CDMA provides minutes of
use at a lower cost than analog technology, improves call quality, permits
longer battery life and improves customer call privacy. In 1997, the Company
initiated installation of digital technology in its greater Raleigh, North
Carolina, service area. The Company expects to begin commercially offering
digital service to its customers in Raleigh in the second quarter of 1998. The
Company also plans to initiate installation of digital technology in five
additional markets in 1998. By the year 2000, the Company expects to offer
digital service in markets that represent more than 80% of its total POPs.
The Company is also migrating its networks to an Advanced Intelligent
Network architecture. This technology will enable enhanced personal mobility and
service flexibility for customers. The Company supports the movement toward
industry standards and interoperability between network elements based on ANSI
41, the standard for inter-system operations. The Company has deployed two Home
Location Registers in its systems to allow for the deployment of advanced
features for customers. In addition, the Company is upgrading the technology in
many of its switches for Signaling System 7 ISDN User Part signaling. This
signaling technology will allow for out-of-band signaling and improved trunking
efficiencies. This signaling technology will also allow the Company to offer
additional features and services such as Caller Line ID.
9
<PAGE>
Distribution Management and Marketing
The Company's distribution management and marketing programs have yielded
strong growth results. The Company's rate of penetration is above the industry
average despite its presence in mid-sized markets. Expansion and management of
the Company's distribution channels is expected to result in continued customer
base growth, along with controlled churn and acquisition costs.
The Company utilizes multiple methods of distribution in each of its
markets, and regularly seeks out new distribution channels. The development of
multiple distribution channels in each of its markets enables the Company to
provide effective and extensive marketing of products and services and to reduce
its reliance on any single distribution source. Traditional distribution sources
like dealers and direct sales representatives continue to be important factors
in achieving the Company's growth objectives. The table below shows the
Company's distribution channels as of December 31, 1997.
Distribution Channel Number
-------------------- ------
Dealer Locations 1,562
Company Retail Stores 147
Company Retail Kiosks 306
Direct Sales Representatives 280
The Company continues to expand and develop its retail stores channel.
Dealer and direct sales channels remain important components of the Company's
growth strategy, with the primary objective for all channels being to produce
the best combination of lower customer acquisition costs and higher retention
rates.
Retail Sales. The Company currently conducts its retail operations through
over 140 Company retail locations. Stand-alone stores are strategically located
in smaller local and neighborhood retail centers as well as in large shopping
malls to capitalize on favorable demographics and retail traffic patterns. The
Company's retail focus helps accomplish three key goals: the highly visible
retail stores attract new customers from the consumer market segment; new
customers receive training from dedicated cellular sales representatives, which
reinforces customer retention and provides opportunities to improve average
revenue per customer; and the incremental cost of obtaining a customer through a
Company retail store is the lowest of any distribution channel.
The Company focuses its full service, stand-alone retail efforts on
sophisticated design and merchandising techniques to simplify the selling
process for potential customers. Customers who enter one of the Company's retail
stores are drawn to one of several "lifestyle zones" which display carefully
selected combinations of cellular telephones, accessories, custom calling
features and rate plans. Each "lifestyle zone" is tailored to attract potential
customers from specific market segments. After selecting a phone and service
plan, new customers receive extensive assistance on the use of a cellular phone
and on the Company's various services. Many retail locations provide vehicle
installation services and while-you-wait cellular telephone troubleshooting and
repair.
The Company also partners with large national retail stores to sell
cellular service directly through Company kiosks. The Company stations retail
sales representatives at kiosks in larger retailers like Wal-Mart to take
advantage of high traffic generated by the retailers, to reduce the cost of the
sale, and to ensure proper training and increase the retention rate of new
customers. Existing customers can purchase cellular telephone accessories, pay
bills or inquire about the Company's services and features while in retail
stores or at kiosks.
Dealers. The Company has entered into dealer agreements with several large
electronics retailers and discounters in its markets, including Sears and Radio
Shack. The Company also contracts with local dealers who operate on a smaller
scale and may offer other wireless services like two-way radio or paging.
In exchange for a commission payment, these dealers solicit customers for
the Company's cellular service. Such dealers are paid a commission for each
customer subject to chargeback provisions if the customer fails to maintain
service for a specified period of time. This arrangement increases store traffic
and sales volume for the dealers, and provides a valuable source of new
customers for the Company.
10
<PAGE>
The Company actively supports its dealers with regular training and
promotional support. In certain markets, the Company stations its own employees
at dealer locations to increase sales volume and improve customer retention.
Direct Sales. The Company's direct sales force, comprised of nearly 300
employees, focuses its efforts on business customers with high phone usage and
multiple lines of service. This channel produces the lowest churn and highest
revenue per customer compared with any other distribution channel.
The Company's compensation structure for the direct sales force has been
designed to reward long-term relationships with business accounts. Direct sales
representatives provide ongoing customer service to business customers,
including bill analysis, equipment upgrades, accessory sales and training on
features and functions. This distribution channel is also responsible for
selling advanced services like custom calling features, data applications,
wireless office extension service to existing office phone systems, voicemail
notification and message retrieval services.
TeleCare. TeleCare is used to make targeted contact with customers that are
designed to improve customer retention levels by anticipating questions and
problems before they arise. An example of a typical TeleCare call would be to
recommend a more cost-effective, and potentially usage-stimulating, rate plan.
New and existing customers are contacted regularly by regional TeleCare teams to
measure overall customer satisfaction with the Company's products and services.
In the past the Company has used these calls to offer additional products and
services to the customer. This marketing opportunity may, in some circumstances,
be restricted by the FCC's recently released order concerning Customer
Proprietary Network Information.
Customer Service
Maintaining low churn rates is a primary goal of the Company, particularly
as new competitors enter the marketplace. Lower churn contributes directly to
acquisition cost savings, since fewer new customers are needed to meet growth
targets. The Company experienced an average monthly churn rate of 1.88% and
1.86% for the year ended December 31, 1997 and 1996, respectively. The Company
attributes its success in this area to its customer support proficiency.
The Company's customer service representatives regularly contact new
customers to answer questions, explain features and service options and gauge
satisfaction levels. Annual third-party customer satisfaction surveys and
periodic focus groups measure overall system quality and provide valuable
insights into customer needs.
Through customer research, the Company has identified speed, accuracy and
simplicity as critical components for success in its customer service
operations. Customers can typically expect to have fully functional service
within fifteen minutes after purchasing a cellular telephone. By employing
advanced computer technology, the Company has further reduced its sales cycle
time. Point of sale terminals provide prompt on-site activation of customer
cellular service. This level of service gives the Company a competitive
advantage as it seeks to partner with dealers in its various markets. The
Company will continue to deliver more flexible customer care and billing,
shorter service activation cycles and increasingly automated processes. These
improvements are intended to reduce churn and lower per-customer operating
costs.
Five twenty-four hour call centers have been established to handle customer
service after business hours and on weekends. The Company offers twenty-four
hour, seven day a week customer service to all of its customers via abbreviated
dialing from customers cellular telephones free of charge, or through a
conventional toll-free number. Airtime and toll-free numbers have been
established to allow customers to call emergency services or roadside
assistance.
Customer service provided by the Company's numerous customer service
facilities generally includes activation of new cellular access lines, response
to billing and service inquiries, assistance to customers from other cellular
11
<PAGE>
markets roaming in the area and response to network outage reports. Customers
can purchase new cellular telephone equipment and service at these facilities,
pay cellular bills, inquire about products and features and obtain cellular
phone repair services.
Pricing
The Company seeks to stimulate additional usage, increase penetration and
improve retention rates through creative pricing strategies. The Company creates
local and expanded service territories designed to meet customer needs. These
range from low-cost, local areas to expanded roaming regions. In February 1997,
the Company simplified its cellular roaming rates by offering simple per-minute
rates based on a particular customer's home zone, regional zone or national
zone. The Company also simplified its cellular long distance pricing by offering
a single per- minute rate for all long distance cellular calls.
Airtime rate plans are crafted to attract users from all market segments at
profitable margins. The Company offers a variety of cellular rate plans to
prospective customers. These plans typically consist of a fixed monthly rate for
network access, a package of airtime minutes included in the monthly rate and a
per minute rate for airtime used in excess of the included airtime package. The
Company also sells airtime in bulk to resellers in certain markets.
Multiple monthly rate plans are designed by the Company to meet different
customer needs. Innovative rate plan development enhances the value of cellular
service to the customer and helps the Company achieve its growth and revenue
targets. Customers who frequently use cellular service generally prefer rate
plans with a higher than average fixed monthly rate, a large package of included
minutes and a lower than average per minute airtime rate. The Company offers
several high-end rate plans which include large blocks of airtime and several
usage-enhancing custom calling features. Customers who use cellular service less
frequently prefer a lower monthly fixed rate and will pay a premium for airtime.
Custom calling features are also made available to enhance the Company's
basic airtime product. These features are similar to custom calling features
available from most local exchange companies, and include call waiting, call
forwarding, three way calling, no-answer transfer and voicemail. Custom features
allow customers to better manage calls and messages, and the Company benefits
from increased airtime usage.
The Company has entered into roaming agreements with other domestic
cellular companies to allow its customers to use cellular service nearly
everywhere in the United States. This system increases the utility of the
Company's product to its customers so that, with few exceptions, customers can
call from anywhere in the United States, to anywhere in the United States.
Although roaming rates are declining, roaming usage is expected to increase.
Consistent with industry trends, the Company has begun to make its roaming rates
more affordable which is expected to increase roaming and usage.
The Company has established regional network and roaming alliances with
neighboring cellular carriers which permit the expansion of the customers' home
footprint. Marketed under SuperNet and other brands, these wide area networks
offer reduced roaming rates, seamless hand-off from the Company's network to a
neighboring cellular network and automatic delivery of inbound calls to the
neighboring market. The Company has also established roaming agreements with
certain PCS carriers to allow their customers to roam on the Company's network.
The Company offers competitive residential long distance and paging rates
in all of its markets.
12
<PAGE>
Product and Service Deployment
The Company continues to introduce new telecommunications products,
features and services to increase the value of the basic cellular voice product
to the customer and to enhance revenues. Through the deployment of N-AMPS
technology, the Company is able to offer many new products designed to give
customers enhanced call management capability and stimulate usage. For example,
VoiceMail Alert notifies customers of incoming voicemail messages while features
like voice-activated dialing and Caller Line ID further enhance the basic
cellular offering. During the third quarter of 1997, the Company introduced a
new service offering called the Bundled Value Pack whereby customers may choose
a combination of cellular and long distance, cellular and paging or all three
services and receive the selected services all on one bill.
Integration of Multiple Telecommunications Services
In 1996, the Company began reselling residential long distance and paging
services in the states in which the Company provides wireless service, using its
existing distribution channels and brand name. The Company markets its cellular,
residential long distance and paging services as an integrated communications
solution on a single bill.
Human Resource Development
The Company utilizes competitive human resource programs, training and
career development practices and financial incentives tied to performance to
provide superior customer service as well as to successfully implement its
operating strategies.
The Company places a strong emphasis on training at all levels of the
organization to augment experience-based learning and to promote performance at
a high level in each position. Formal succession planning and training is also
employed to provide the knowledge and skills needed to create depth of expertise
and enable career advancement within the organization.
All employees are rewarded for performance in key areas of the business.
The objectives which determine the executive management team's compensation are
shared by the entire organization, and every employee receives incentive pay in
some form. Those employees who do not earn sales commissions are eligible for an
annual incentive payment based on a combination of personal achievement and
performance measured by key objectives at the appropriate operating level (e.g.,
local markets, regions or total company). In 1997, these objectives included
increasing service revenues, net customers and cash flow, and decreasing
customer churn.
Cellular Telephone Technology
Cellular communications systems are capable of providing high quality, high
capacity voice and data communications to and from vehicle-mounted and hand-held
radio telephones. Cellular communications systems generally offer customers the
features offered by the most technologically advanced landline telephone
services.
The FCC has allocated two cellular communications system frequencies in the
800 MHz band of the radio spectrum and has promulgated rules governing the
construction and operation of cellular communications systems and licensing for
the provision of cellular telephone service. See "Business-Governmental
Regulation-Regulation and Licensing of Cellular Communications System."
Cellular communications technology is based upon the division of a given
market area into a number of smaller geographic areas or "cells." Each cell is
equipped with transmitter-receivers and other equipment that communicate by
radio signal with cellular telephones located within range of the cell. Cells
generally have an operating range of up to 25 miles. The cells are typically
designed on a grid. Terrain factors, including natural and man-made
obstructions, signal coverage patterns and capacity constraints may result in
irregularly shaped cells and overlaps or gaps in coverage.
13
<PAGE>
Each cell site is connected to a mobile switching center ("MSC"), which, in
turn, is connected to the local landline telephone network. Because cellular
communications systems are fully interconnected with the landline telephone
network and long distance networks, customers can receive and originate both
local and long distance calls from their cellular telephones. When a customer in
a particular cell dials a number, the cellular telephone sends the call by radio
signal to the cell's transmitter-receiver, which in turn transmits it to the
MSC. The MSC then completes the call by connecting it with the landline
telephone network or another cellular telephone unit. Incoming calls are
received by the MSC, which instructs the appropriate cell to complete the
communications link by radio signal between the cell's transmitter-receiver and
the cellular telephone. Cellular communications systems operate under
interconnection agreements with various local exchange carriers and
interexchange carriers. Interconnection agreements establish the manner in which
the cellular telephone system integrates with other telecommunications systems.
The cellular operator and the local landline telephone company must cooperate in
the interconnection between the cellular and landline telephone systems to
permit cellular customers to call landline customers and vice versa. The
technical and financial details of such interconnection arrangements are subject
to negotiation and vary from system to system.
FCC Rules require that all cellular telephones be functionally compatible
with cellular systems in all markets within the United States and with all
frequencies allocated for cellular use, allowing a cellular telephone to be used
wherever a customer is located, subject to appropriate arrangements for service
charges. Changes to cellular telephone numbers or other technical adjustments to
cellular telephones by the manufacturer or local cellular telephone service
businesses may be required, however, to enable the customer to change from one
cellular service provider to another within a service area.
The rapid growth of the cellular customer base has begun to strain the
call-processing capacity of many existing analog networks. Present analog
technology and assigned spectrum limit the number of signals that can be
transmitted simultaneously in a given area. In highly populated MSAs, the level
of demand for mobile and portable service is often greater than existing
capacity. Because the primary objective of the cellular licensing process is to
address mobile and portable uses, operators in highly populated MSAs may have
capacity constraints which limit their ability to provide alternate cellular
service.
Each cellular network is designed to meet a certain level of customer
density and traffic demand. Once these traffic levels are exceeded, the operator
must take steps to improve the network capacity. This improvement can initially
be accomplished by adding voice channels to cell sites, and later by using
techniques such as sectorization and cell splitting. Network operators and
infrastructure manufacturers are developing a number of additional solutions
which are expected to increase network capacity and coverage.
Within certain limitations, increasing demand may be met by simply adding
available frequency capacity through voice channel additions to cells as
required, or by using directional antennae to divide a cell into discrete
multiple sectors or coverage areas (also known as sectorization), thereby
reducing the required distance between cells using the same frequency. When all
possible channels are in use, further growth can be accomplished through a
process called "cell splitting." Cell splitting entails dividing a single cell
into a number of smaller cells served by lower-tower transmitters, thereby
increasing the reuse factor and the number of calls that can be handled in a
given area.
Network capacity can also be enhanced through the development of newer
network technologies like N-AMPS analog technology (which triples call carrying
capacity over conventional analog technology) and CDMA digital technology (which
increases call carrying capacity over conventional analog technology by an
estimated factor of 6 to 10), which in each case allow cellular carriers to add
customers without degrading service quality. Digital technology offers
advantages, including larger system capacity, and lower incremental costs for
additional customers. The Company anticipates that markets representing more
than 80% of its total POPs will be covered by digital service by the year 2000.
14
<PAGE>
The Company believes that its networks have sufficient capacity to handle
the Company's customer growth rate in the near term. In the future, the Company
intends to meet any capacity requirements through frequency planning, network
optimization and the deployment of network infrastructure. The Company plans to
accelerate its transition to digital technology on a market-by-market basis. See
"Business-Governmental Regulation-State, Local and Other Regulation" for a
discussion on those governmental regulations which may restrict the Company's
ability to install additional cell sites.
Competition
Cellular carriers currently compete primarily against the other
facilities-based cellular carrier in each MSA and RSA market, and PCS in certain
markets. Companies with PCS licenses offer their products and services in
markets that represent about 50% of the Company's total POPs. PCS services
generally consist of wireless two-way telecommunications services for voice,
data and other transmissions employing digital technology. PCS operates in the
1850 to 1900 MHz band. The Company also faces competition from ESMR systems and
resellers. ESMR is a wireless communications service supplied by converting
analog SMR services into an integrated, digital transmission system.
The Company believes that competition for customers between cellular
licensees is based principally upon the services and enhancements offered, the
quality of the cellular system, customer service, system coverage and capacity
and price. Such competition may increase to the extent that licenses are
transferred from smaller, stand-alone operators to larger, better capitalized
and more experienced cellular operators who may be able to offer consumers
certain network advantages similar to those offered by the Company.
Existing and new users of cellular systems may also find their
communications needs satisfied by other current and developing technologies,
such as PCS. Licensing areas for broadband PCS have been divided into 51 MTAs
and 493 smaller Basic Trading Areas ("BTAs") based on the geographic divisions
in the 1992 Rand McNally Commercial Atlas & Marketing Guide. There could be a
minimum of three and a maximum of six broadband PCS providers in any given area.
Of the six available PCS licenses, three provide authority to utilize 30 MHz of
PCS spectrum, one on a BTA basis, and the remaining three 10 MHz, all on a BTA
basis.
The FCC has allocated a total of 2,071 broadband licenses by auction,
according to rules that, among other things, prohibit a commercial mobile radio
services ("CMRS") licensee from having an attributable interest in more than 45
MHz of licensed broadband PCS, cellular and SMR spectrum (regulated as CMRS)
with significant overlap in any geographic area. Significant overlap is defined
as covering at least 10 percent of the population of the PCS licensed service
area. Thus, given the 25 MHz of spectrum afforded cellular carriers under the
cellular rules, cellular carriers could acquire up to 20 MHz of PCS spectrum
within their cellular markets (assuming that they had no other CMRS interests in
that geographic area).
The Company has prepared for this competitive environment by enhancing its
networks, expanding its service territory and offering new features, products
and services to its customers. In addition, the Company intends to further
capitalize on its position as an incumbent provider in the cellular field with a
high quality network and extensive footprint that is not capacity constrained,
strong distribution channels, superior customer service capabilities and an
experienced management team. Because the Company operates in medium to small
markets, PCS licensees are unlikely to offer comparable wireless service in many
of the Company's territories in the near term because the extensive capital
expenditures required to deploy the infrastructure for PCS are more readily
justifiable from an economic standpoint in larger, more densely populated urban
areas. The Company has established roaming agreements with certain PCS carriers
to allow their customers to roam on the Company's network and is capable of
providing bulk lines of service for resale to PCS licensees.
Nationally, 25 PCS licensees have launched commercial service in markets
representing 185 million total POPs, or approximately 73% of the U.S.
population, according to industry statistics. PCS licensees competing with the
Company, however, have launched commercial service in markets representing about
50% of the Company's total POPs. Although the rate of new PCS launches has
15
<PAGE>
slowed nationally and in the Company's markets since early 1997, the Company
expects PCS licensees in its markets to improve their competitiveness over time.
Many PCS licensees competing with the Company have access to more substantial
capital resources than the Company. In addition, many of these companies, or
their predecessors and affiliates, already operate large cellular telephone
networks and thus bring significant wireless experience to this new marketplace.
The FCC requires all cellular system operators to provide service to
"resellers." A reseller provides cellular service to customers but does not hold
an FCC cellular license or own cellular facilities. Instead, the reseller buys
blocks of cellular telephone numbers from one or both of the licensed carriers
in a particular market and resells service through its own distribution channels
to the public. Thus, a reseller may be a customer of a cellular licensee's
services, a competitor of that licensee, or both. The Company will explore
additional relationships with resellers to supplement existing distribution
channels and to reach specific market segments. The Company expects to offer
competitive bulk airtime pricing, as well as enhanced billing and marketing
services in order to attract resellers in its markets without eroding airtime
profit margins or inflating acquisition costs. The number of resellers is
currently small, but it is expected to increase in the Company's markets.
Recently, several well-known telecommunications companies have begun reselling
cellular service as a complement to their long distance, local telephone,
paging, cable television or Internet offerings. The Company believes that this
development will stimulate overall market interest in cellular service and thus
is not expected to have a material adverse effect on the Company's business for
the foreseeable future.
Governmental Regulation
Regulation and Licensing of Cellular Communications Systems
The Company is subject to extensive regulation by the Federal government as
a provider of cellular communications services. Pursuant to the Communications
Act of 1934, as amended ("Communications Act"), the licensing, construction,
operation, acquisition and transfer of cellular communications systems in the
United States are regulated by the FCC. The FCC has promulgated rules governing
the construction and operation of cellular communications systems and licensing
and technical standards for the provision of cellular telephone service ("FCC
Rules"). For licensing purposes, the United States is divided into 734 discrete
geographically defined market areas comprised of 306 MSAs and 428 RSAs.
In each market, the frequencies allocated for cellular telephone use are
divided into two equal 25 MHz blocks and designated as Block A and Block B.
Block B licenses were initially reserved for entities affiliated with a wireline
telephone company, such as the Company was at that time, while Block A licenses
were initially reserved for non-wireline entities. Under current FCC Rules, a
Block A or Block B license may be transferred or assigned with FCC approval
without restriction as to wireline affiliation, but generally, no entity may own
a substantial interest in both systems in any one MSA or RSA. The FCC may
prohibit or impose conditions on sales or transfers of licenses.
Initial operating licenses are generally granted for terms of up to 10
years, beginning on the dates of the grant of the Initial Operating Authority
and are renewable upon application to the FCC. Licenses may be revoked and
license renewal applications denied for cause after appropriate notice and
hearing. The FCC generally grants current licensees a license renewal if they
have substantially complied with their obligations under the Communications Act
during their license terms. A potential challenger would bear a heavy burden to
demonstrate that a license should not be renewed if the licensee's performance
merits a renewal expectancy.
Cellular service providers must satisfy a variety of FCC requirements
relating to technical and reporting matters. One such requirement is the
coordination of proposed frequency usage with adjacent cellular users,
permittees and licensees in order to avoid interference between adjacent
systems. In addition, the height and power of base station transmitting
facilities and the type of signals they emit must fall within specified
parameters. The FCC also regulates cellular service resale practices and the
terms under which certain ancillary services may be provided through cellular
facilities. The Company currently is taking steps to ensure full compliance with
the FCC's recently announced but as yet unpublished rules regarding Customer
Proprietary Network Information.
16
<PAGE>
The Company also regularly applies for FCC authority to use additional
frequencies, to modify the technical parameters of existing licenses, to expand
its service territory and to provide new services. The Communications Act
requires prior FCC approval for transfers to or from the Company of a
controlling interest in any license or construction permit, or any rights
thereunder. Although there can be no assurance that any future requests for
approval of applications filed will be approved or acted upon in a timely manner
by the FCC, the Company has no reason to believe such requests or applications
would not be approved or granted in due course.
Near the conclusion of the license term, licensees must file applications
for renewal of licenses to obtain authority to operate for up to an additional
10-year term. Applications for license renewal may be denied if the FCC
determines that the grant of an application would not serve the public interest.
In addition, at license renewal time, other parties may file competing
applications for authorization. In the event that qualified competitors file,
the FCC may be required to hold a hearing to determine whether the incumbent or
the competitor will receive the license. In 1993, the FCC adopted specific
standards to apply to cellular renewals, concluding that it will award a renewal
expectancy to a cellular licensee that meets certain standards of past
performance. If the existing licensee receives a renewal expectancy, it is very
likely that the existing licensee's cellular license will be renewed without a
full comparative hearing. To receive a renewal expectancy, a licensee must show
that it (i) has provided "substantial" service during its past license term, and
(ii) has substantially complied with applicable FCC rules and policies and the
Communications Act. "Substantial" service is defined as service which is sound,
favorable and substantially above a level of mediocre service that might only
minimally warrant renewal.
In 1994, the Company filed for renewal of five expiring licenses which were
originally granted by the FCC during 1985. All five licenses (Harrisburg, PA;
Charleston, SC; Youngstown, OH; Greensboro, NC; and Toledo, OH) were approved
without challenge. In September 1995, the Company filed for renewal of six
expiring FCC licenses (Raleigh, NC; Las Vegas, NV; Norfolk, VA; Newport News,
VA; Johnson City, TN; and Greenville, SC). All six licenses were approved
without challenge. In September 1996, the Company filed for renewal of thirteen
expiring FCC licenses (York, PA; Peoria, IL; Lancaster, PA; Southbend-Mishawaka,
IN; Fayetteville, NC; Lima, OH; Killeen-Temple, TX; Tallahassee, FL;
Elkhart-Goshen, IN; Anderson, SC; Sharon, PA; Dothan, AL; and Burlington, NC).
All thirteen licenses were approved without challenge. In 1997, the Company
filed for renewal of twenty expiring licenses (Altoona, PA; Cedar Rapids, IA;
Charlottesville, VA; Danville, VA; Fort Walton Beach, FL; Hickory, NC;
Huntington-Ashland, WV/KY/OH; Jacksonville, NC; Johnstown, PA;
Longview-Marshall, TX; Lynchburg, VA; Mansfield, OH; Panama City, FL; State
College, PA; Steubenville-Weirton, OH/WV; Waco, TX; Waterloo-Cedar Falls, IA;
Wheeling, WV/OH; Wilmington, NC; Tyler, TX.) All twenty licenses were approved
without challenge. In its applications for renewal, the Company demonstrated not
only its compliance with FCC regulations, but also its service in the public
interest. The Company is confident that it will continue to meet all
requirements necessary to secure renewal of its cellular licenses as they
expire.
Character and Citizenship Requirements
Applications for FCC authority may be denied, and in extreme cases licenses
may be revoked, if the FCC finds that an entity lacks the requisite "character"
qualifications to be a licensee. In making that determination, the FCC considers
whether an applicant or licensee has been the subject of adverse findings in a
judicial or administrative proceeding involving felonies, the possession or sale
of unlawful drugs, fraud, antitrust violations or unfair competition, employment
discrimination, misrepresentations to the FCC or other government agencies, or
serious violations of the Communications Act or FCC regulations. The FCC also
requires licensees to comply with statutory restrictions on the direct or
indirect ownership or control of radio licenses by non-U.S. persons or entities.
The FCC has found the Company to be qualified to hold FCC licenses and the
Company has included provisions in its Amended and Restated Certificate of
Incorporation, as amended, which authorize it to redeem its stock from any
person whose ownership would jeopardize the grant, holding or renewal of any
material license held by the Company.
17
<PAGE>
Federal Legislation
Recent legislative changes to the Communications Act and the antitrust
consent decree applicable to the Regional Bell Operating Companies ("RBOCs")
affect the cellular industry. This legislation (known as the Telecommunications
Act of 1996), among other things, affects competition for local
telecommunications services, interconnection arrangements for carriers,
universal service funding and the provision of interexchange services by the
RBOCs wireless systems.
State, Local and Other Regulation
Congress amended the Communications Act to preempt, as of August 10, 1994,
state or local regulation of the entry of, or the rates charged by, any
commercial mobile service or any private mobile service, which includes cellular
telephone service. Notwithstanding such preemption, a state had until August 10,
1994 to petition the FCC for authority to continue regulating the rates for any
commercial mobile service. Eight states filed petitions to continue their rate
regulation authority: Arizona, California, Connecticut, Hawaii, Louisiana, New
York, Ohio and Wyoming. In May 1995, the FCC denied all eight petitions and
precluded those states from regulating the rates for commercial mobile service
providers, including cellular operators. As a practical matter, the Company is
free to establish rates and offer new products and service with a minimum of
state regulatory requirements. A few of the Company's 15 states of operation
still maintain nominal oversight jurisdiction, primarily focusing upon
resolution of customer complaints. In such states (primarily Kentucky, Nevada
and Ohio), the Company devotes resources as necessary to maintaining positive
relationships with state utility commissions.
The location and construction of cellular transmitter towers and antennas
are subject to United States Federal Aviation Administration ("FAA") regulations
and may be subject to United States Federal, state and local environmental
regulation as well as state or local zoning, land use and other regulation.
Before a system can be put into commercial operation, the grantee of a
construction permit must obtain all necessary zoning and building permit
approvals for the cell sites and MSC locations and must secure state
certification and tariff approvals, if required. The time needed to obtain
zoning approvals and requisite state permits varies from market to market and
state to state. Likewise, variations exist in local zoning processes. There can
be no assurance that any state or local regulatory requirements currently
applicable to the systems in which the Company's affiliates have an interest
will not be changed in the future or that regulatory requirements will not be
adopted in those states and localities which currently have none.
Zoning and planning regulation may become more restrictive in the future
with the addition of PCS carriers seeking sites for network construction as
well. The Telecommunications Act of 1996, however, has imposed certain
limitations on the arbitrary restriction of the expansion of cellular networks
by state or local government agencies.
Employees
At December 31, 1997 the Company had approximately 4,400 employees,
including non-controlled Company markets that are managed by the Company, none
of whom is represented by a labor organization. Management of the Company
considers its relations with employees to be excellent.
Item 2. Properties.
The Company maintains its corporate headquarters in Chicago, Illinois. The
Company currently leases approximately 208,000 square feet in this facility. For
each cluster of markets served by the Company's operations, the Company
maintains at least one sales or administrative office and a number of cell
transmitter and antenna sites. Most facilities are leased and some are owned. As
of December 31, 1997, the Company had approximately 140 leases for retail stores
used as one of its distribution channels. The Company believes that its
facilities are in good working condition, suitable for its current business and
that additional facilities will be available for its foreseeable needs.
18
<PAGE>
Item 3. Legal Proceedings.
In August 1995, four independent dealers filed a lawsuit in the Court of
Common Pleas of Greenville County, South Carolina, alleging that the Company
breached its dealer agreements with the plaintiffs and engaged in unfair trade
practices. In particular, the plaintiffs alleged that the Company discontinued
the practice of allowing the plaintiffs to sell cellular telephones out of the
Company's inventory, and instead required the plaintiffs to maintain their own
inventories and sold cellular telephones to the public at prices lower than the
prices that the Company charged to the plaintiffs. On November 21, 1997, a jury
awarded the plaintiffs $1.9 million in compensatory damages and $10 million in
punitive damages. The Company has filed an appeal with the South Carolina
Supreme Court seeking to reverse the decision. The Company believes that it
acted in accordance with the dealer agreements and that the decision is wholly
unwarranted by the facts. The Company does not believe that this proceeding will
have a material adverse effect on the results of operations or financial
position of the Company.
In March 1996, a lawsuit was brought in the Chancery Court of Washington
County, Jonesborough, Tennessee (the "Tennessee Action"), on behalf of all
customers in the Company's Tennessee markets regarding customer notification of
the Company's practice with respect to billing for fractional minutes of
service. In April 1996, the original complaint was amended to enlarge the class
of plaintiffs to include all customers in all of the Company's service areas. In
late April 1996, the Tennessee Action was removed to the United States District
Court for the Eastern District of Tennessee, Northern Division. The Company
moved to dismiss the action and the plaintiff filed a motion to remand. On July
16, 1996, the Tennessee District Court granted the plaintiff's motion to remand
and returned the case to the Chancery Court of Washington County. The Company's
Motion to Dismiss is currently pending before the Chancery Court. The Company
believes the lawsuit to be without merit.
In May 1996, a lawsuit was brought in the Common Pleas Court of Erie
County, Ohio (the "Ohio Action"), on behalf of all customers in all of the
Company's service areas regarding notification of the Company's practice with
respect to billing for fractional minutes of service. On June 25, 1996, the Ohio
Action was removed to the United States District Court for the Northern District
of Ohio, Western Division. Thereafter, the Company filed a Motion to Dismiss Or
In The Alternative, Stay pending resolution of the Tennessee Action and the
plaintiff filed a Motion to Remand. By Order dated December 17, 1996, the Ohio
District Court granted plaintiff's motion to remand and the Ohio Action was
returned to the Common Pleas Court. Plaintiff has recently commenced discovery
by serving a document request and interrogatories. On January 17, 1997, the
Company filed a Motion to Stay This Action And For A Protective Order seeking to
stay the Ohio Action, including all discovery, pending resolution of the
Tennessee Action. The basis for the Motion to Stay, which is currently pending
before the Common Pleas Court, is the duplicity of the Ohio Action and the
Tennessee Action. The Company believes the lawsuit to be without merit.
In March 1998, a separate lawsuit similar to the August 1995 dealer lawsuit
was brought in the Court of Common Pleas of Greenville County, South Carolina,
by an independent dealer alleging that the Company breached its dealer agreement
with the plaintiff and engaged in unfair trade practices by discontinuing the
practice of allowing the plaintiff to sell cellular telephones out of the
Company's inventory and by selling cellular telephones to the public at prices
lower than the prices that the Company charged to the plaintiff. The Company
believes the lawsuit to be without merit and intends to defend itself
vigorously. The Company does not believe that this proceeding will have a
material adverse effect on the results of operations or financial position of
the Company.
In March 1998, the Company and all of its current directors were named as
defendants in a complaint filed in the Court of Chancery in the State of
Delaware. The complaint was brought by a purported shareowner of the Company,
individually and purportedly as a class action on behalf of all other
shareowners of the Company. The complaint alleges breaches of fiduciary duty by
the Company's directors in connection with the Merger and seeks to enjoin the
consummation of the Merger and other unspecified damages. The defendants believe
the complaint to be without merit and the Company does not believe that this
proceeding will have a material adverse effect on the results of operations or
financial position of the Company.
19
<PAGE>
The Company is party to various other legal proceedings in the ordinary
course of its business. Although the ultimate resolution of these various other
proceedings cannot be ascertained, management of the Company does not believe
that such proceedings, individually or in the aggregate, will have a material
adverse effect on the results of operations or financial position of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders of the Company
during the quarter ended December 31, 1997.
Item 4a. Executive Officers of the Registrant.
Set forth below is certain information concerning the executive officers of
the Company. The executive officers' continued service is determined solely by
the Company's Board of Directors.
Name Age Position and Offices Held
- ------------------ --- --------------------------------------------------------
Dennis E. Foster 57 President and Chief Executive Officer and Director
Kevin L. Beebe 39 Executive Vice President-Operations
Michael J. Small 40 Executive Vice President and Chief Financial Officer
Susan L. Amato 39 Senior Vice President-Marketing
Gary L. Burge 44 Senior Vice President-Engineering and Network Operations
Debra L. Ferrari 40 Senior Vice President-Human Resources
Kevin C. Gallagher 50 Senior Vice President, General Counsel and Secretary
Jeffery R. Gardner 38 Senior Vice President-Finance
Mr. Foster was elected President of the Company in March 1993 and President
and Chief Executive Officer of the Company in February 1996. He has served as a
director of the Company since March 7, 1996. Mr. Foster had been President and
Chief Operating Officer of the Cellular and Wireless Division of Sprint since
March 1993, a position he resigned from effective with the spinoff, and prior to
that he was Senior Vice President of the Local Telecommunications Division of
Sprint beginning in May 1992. Prior to joining Sprint, he was President and
Chief Operating Officer of GTE Mobilnet, a position he had held since June 1991.
Mr. Foster had been Area Vice President and General Manager of GTE North since
September 1989.
Mr. Beebe was elected Executive Vice President-Operations of the Company on
February 6, 1996. Prior to the spinoff, Mr. Beebe had been employed by Sprint or
its subsidiaries for over 11 years, joining the Company in February 1994 as Vice
President-Marketing and Administration. In April 1995, he became Vice President
- - Operations. Prior to joining the Company and beginning in June 1991, he served
with Sprint's United North Central as Director of Marketing. In November 1990,
Mr. Beebe became Director of the Engineering and Operations Staff at United
Telephone Systems-Southeast Group and became Director of Product Management
Business Development in June 1988.
Mr. Small was elected Executive Vice President and Chief Financial Officer
of the Company effective December 1, 1995. Prior to that time he served as a
member of the Office of the President of Lynch Corporation as well as President
and Chief Executive Officer of Lynch Multimedia since January 1994. Prior to his
positions with Lynch Corporation, he was employed by Sprint or its subsidiaries
and Centel Corporation, a predecessor corporation, or its subsidiaries for over
12 years. He joined the cellular organization in March 1991 as Executive Vice
President- Administration and Engineering and prior to that served as Vice
President of Investor Relations at Centel Corporation since September 1989.
20
<PAGE>
Ms. Amato was elected Senior Vice President-Marketing of the Company on
July 14, 1997. She had served as Senior Vice President-Engineering and Network
Operations of the Company since February 6, 1996. Prior to the spinoff, Ms.
Amato had been employed by Sprint or its subsidiaries and Centel Corporation, a
predecessor corporation, or its subsidiaries for over 14 years. She joined the
cellular organization in September 1990 as Regional Vice President of the
Mid-Atlantic region and became Vice President-Wireless Business Development in
February 1994 and Vice President-Engineering and Network Operations in February
1995.
Mr. Burge was elected Senior Vice President-Engineering and Network
Operations of the Company on July 14, 1997. He had served as Senior Vice
President-Finance of the Company since February 6, 1996. Prior to the spinoff,
Mr. Burge had been employed by Sprint or its subsidiaries and Centel
Corporation, a predecessor corporation, or its subsidiaries for over 14 years.
He joined the cellular organization in November 1989 as Controller and became
Vice President and Controller in April 1991 and Vice President - Finance and
Administration in March 1995.
Ms. Ferrari was elected Senior Vice President-Human Resources of the
Company on November 1, 1997. She had served as Vice President - Human Resources
of the Company since February 6, 1996. Prior to the spinoff, Ms. Ferrari had
been employed by Sprint or its subsidiaries and Centel Corporation, a
predecessor corporation, or its subsidiaries for over 12 years. She joined the
Company in September 1993 as Director of Human Resources. Prior to joining the
Company and beginning in January 1987, she was with Centel Corporation as
General Staff Manager of Compensation Planning.
Mr. Gallagher was elected Senior Vice President, General Counsel and
Secretary of the Company on February 6, 1996. Prior to the spinoff, Mr.
Gallagher had been employed by Sprint or its subsidiaries and Centel
Corporation, a predecessor corporation, or its subsidiaries for over 14 years.
He joined the cellular organization in January 1990 as Vice President of Legal,
became Vice President of Legal and External Affairs in May 1991 and Vice
President and General Counsel in September 1992.
Mr. Gardner was elected Senior Vice President-Finance of the Company on
July 14, 1997. He had served as President of the Mid-Atlantic region of the
Company since February 1994. Prior to the spinoff, Mr. Gardner had been employed
by Sprint or its subsidiaries and Centel Corporation, a predecessor corporation,
or its subsidiaries for nearly 11 years. He joined the cellular organization in
March 1988 as an Operations Accounting Manager, became Director of Accounting in
November 1990, and General Manager of the Las Vegas market in November 1992.
21
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The outstanding shares of the Company's Common Stock are listed on the New
York Stock Exchange, the Chicago Stock Exchange and the Pacific Exchange and
trade under the symbol XO.
Trading of the Common Stock commenced on the New York Stock Exchange on a
when-issued basis on February 23, 1996, and commenced on a regular-way basis on
March 7, 1996. Prior to the spinoff, the Company was an indirect, wholly owned
subsidiary of Sprint and there was no trading market for the Common Stock. The
following table sets forth the high and low sale prices of the Common Stock as
reported on the New York Stock Exchange Composite Tape for each quarter in 1997
and 1996.
1996 High Low 1997 High Low
-------------- ------- ------- -------------- -------- --------
First Quarter 27 21 1/2 First Quarter 24 3/8 16 7/8
Second Quarter 25 1/8 22 1/8 Second Quarter 19 5/8 13 7/8
Third Quarter 24 3/4 22 Third Quarter 22 16 5/8
Fourth Quarter 25 7/8 22 1/4 Fourth Quarter 22 3/8 18 5/8
On March 25, 1998, there were approximately 61,523 registered holders of
the Common Stock.
The Company currently does not anticipate paying cash dividends on the
Common Stock in the foreseeable future. The future dividend policy will be
determined on the basis of various factors, including the Company's results of
operations, financial condition, capital requirements, and investment
opportunities. In addition, the Company's existing debt instruments limit the
Company's ability to pay dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation-Liquidity and Capital Resources."
Rights Plan
Prior to the spinoff, the Company's Board of Directors adopted a rights
plan pursuant to which the Company distributed a dividend of one right (a
"Right") to purchase certain shares of capital stock of the Company under
certain circumstances, for each outstanding share of the Common Stock (the
"Rights Plan"). The Rights are currently traded with the Common Stock and detach
and become exercisable only if, in a transaction not approved by the Company's
Board of Directors, a person or entity acquires 15% or more of the outstanding
shares of the Common Stock or announces a tender offer the consummation of which
would result in ownership by a person or group of 15% or more of such shares.
Once the Rights detach and become exercisable, unless subsequently
redeemed, each Right then entitles its holder to purchase one one-hundredth of a
share of the Company's Preferred Stock, First Series Junior Participating
Preferred Stock (the "First Series Preferred Stock"), for an exercise price of
$100.00, subject to certain adjustments. If the Company is involved in a merger
or other business combination transaction after the Rights become exercisable,
each Right will entitle its holder to purchase, for the Right's exercise price,
a number of the acquiring or surviving company's shares of common stock having a
market value equal to twice the exercise price. The Company will be entitled to
redeem the Rights at $.01 per Right at any time until ten business days
following a public announcement that a person or group of persons has acquired
beneficial ownership of 15% or more of the outstanding shares of the Common
Stock ("Acquiring Person"); provided, however, that a person who acquires
beneficial ownership of 15% or more of the outstanding shares of the Common
Stock solely as a result of repurchases by the Company of the Common Stock is
not considered an Acquiring Person under the Rights Plan unless such person
purchases or otherwise becomes the beneficial owner of an additional 1% of the
22
<PAGE>
then outstanding shares of the Common Stock. Following such an announcement, or,
subject to certain exceptions, the acquisition of beneficial ownership of 15% or
more of the outstanding shares of the Common Stock by the Acquiring Person or
certain related persons, the Rights acquired by such person or persons shall be
null and void. Prior to the date upon which the Rights detach, the terms of the
Rights Plan may be amended by the Company's Board of Directors without the
consent of the holders of the Rights. The Rights will expire in 2006, unless
earlier redeemed by the Company.
Effective March 16, 1998, the Company's Board of Directors amended the
Rights Plan to (i) exclude from the definition of Acquiring Person, ALLTEL and
its affiliates; provided that ALLTEL or any of its affiliates does not acquire
beneficial ownership of 15% or more of the outstanding shares of the Common
Stock other than pursuant to the Merger Agreement or the Stock Option Agreement
and (ii) amend the expiration date of the Rights to the earlier of March 5, 2006
and the time immediately prior to the effective time of the Merger.
The Rights Plan is not intended to deter all takeover bids for the Company.
To the extent an acquirer is discouraged by the Rights Plan from acquiring an
equity position in the Company, shareowners may be deprived from receiving a
premium for their shares. The issuance of additional shares of the Common Stock
prior to the time the Rights become exercisable will result in an increase in
the number of Rights outstanding.
The First Series Preferred Stock, if issued, will rank junior to all other
series of the Company's Preferred Stock, $0.01 par value, (the "Preferred
Stock"), as to the payment of dividends and the distribution of assets in
liquidation, unless the terms of any such other series shall provide otherwise.
Each share of the First Series Preferred Stock will have a quarterly dividend
rate per share equal to the greater of $1.00 or 100 times the per share amount
of any dividend (other than a dividend payable in shares of the Common Stock or
a subdivision of the Common Stock) declared from time to time on the Common
Stock, subject to certain adjustments. The holders of the First Series Preferred
Stock will be entitled to receive a preferred liquidation payment per share of
$10.00 (plus accrued and unpaid dividends) or, if greater, an amount equal to
100 times the payment to be made per share of the Common Stock. Generally, the
holder of each share of the First Series Preferred Stock will vote together with
the Common Stock (and any other series of the Preferred Stock entitled to vote
on such matter) on any matter as to which the Common Stock is entitled to vote,
including the election of directors. The holder of each share of the First
Series Preferred Stock will be entitled to 100 votes. In the event of any
merger, consolidation, combination or other transaction in which shares of the
Common Stock are exchanged for or changed into other stock or securities, cash
and/or property, the holder of each share of the First Series Preferred Stock
will be entitled to receive 100 times the aggregate amount of stock, securities,
cash and/or property into which or for which each share of the Common Stock is
changed or exchanged.
The foregoing dividend, voting and liquidation rights of the First Series
Preferred Stock are protected against dilution in the event that additional
shares of the Common Stock are issued pursuant to a stock split or stock
dividend. Because of the nature of the First Series Preferred Stock's dividend,
voting, liquidation and other rights, the value of the one one-hundredths of a
share of the First Series Preferred Stock purchasable with each Right is
intended to approximate the value of two shares of the Common Stock.
The foregoing summary descriptions of the Rights and the Rights Plan do not
purport to be complete and are qualified in their entirety by reference to the
Rights Agreement dated as of March 5, 1996 between the Company and Chemical
Bank, as Rights Agent, and the First Amendment to Rights Agreement dated as of
March 16, 1998 to Rights Agreement dated as of March 5, 1996 between the Company
and The Chase Manhattan Bank, as successor in interest to Chemical Bank, as
Rights Agent, copies of which are incorporated by reference herein as Exhibits
4.4 and 4.9, respectively, to this Report.
Recent Sales of Unregistered Securities
On March 16, 1998, the Company granted to ALLTEL the Option to purchase up
to 19.9% of the number of shares of the Company's Common Stock issued and
outstanding immediately prior to the grant of the Option (approximately
24,140,553 shares) at an exercise price of $33.90 per share (subject to
adjustment in certain circumstances). The Option is exercisable by ALLTEL only
in the event that ALLTEL becomes entitled to receive the Termination Fee under
23
<PAGE>
the Merger Agreement. Concurrently with any exercise of the Option, the Company
has the option to repurchase from ALLTEL, at a price of $35.90 per share, any
shares issued upon the exercise of the Option. See "Business-General-Merger
Agreement with ALLTEL Corporation."
In granting the Option, the Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
The Company's reliance was based on, among other things, representations made by
ALLTEL contained in the Stock Option Agreement, a copy of which is incorporated
by reference herein as Exhibit 2.5 to this Report.
On November 1, 1996, the Company issued to Independent Cellular Network
Partners and certain of its affiliates (collectively, "ICNP"), 6,500,000 shares
of the Company's Common Stock and $122 million in aggregate face principal
amount of the Company's subordinated non-negotiable promissory notes as a
portion of the purchase price paid in connection with the ICN Acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation-Cash Flows-Investing Activities."
In issuing such securities, the Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
The Company's reliance was based on, among other things, representations made by
ICNP contained in the Exchange and Merger Agreement, dated as of May 31, 1996, a
copy of which is incorporated by reference herein as Exhibit 2.2 to this Report.
Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
For The Year Ended and as of December 31,
---------------------------------------------------------------------------------------------------
1997 1996 (1) 1995 1994 1993 1992 1991 1990
----------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
(in thousands, (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total operating revenues $1,347,172 $1,095,872 $ 834,415 $ 626,475 $ 410,480 $ 280,119 $ 213,515 $ 161,915
Net income (loss) $ 81,495 $ 59,519 $ (1,695) $ (19,757) $ (51,484) $ (65,522) $ (64,277) $ (74,961)
Earnings (loss) per share(2) $ 0.67 $ 0.50 $ (0.01) $ (0.17) $ (0.45) $ (0.58) $ (0.58) $ (0.68)
Total assets $2,941,924 $2,812,069 $1,973,246 $1,728,344 $1,505,221 $1,494,648 $1,390,245 $1,270,563
Long-term debt (3) $1,825,347 $1,699,778 $1,517,729 $1,354,116 $1,246,822 $1,249,168 $1,109,796 $ 969,544
- -----------------
<FN>
(1) On March 7, 1996, the spinoff from Sprint Corporation was consummated.
Additionally, on November 1, 1996, the Company completed its acquisition of
Independent Cellular Network, Inc. and affiliated companies. See Notes to
Consolidated Financial Statements for more information regarding these events.
(2) In 1995 and prior years, earnings (loss) per share has been calculated based
upon the number of Sprint Corporation weighted average shares outstanding for
each respective period, adjusted for a conversion ratio of one share of
360 common stock to three shares of Sprint common stock.
(3) Represents advances from and notes to affiliates for 1995 and prior years.
</FN>
</TABLE>
24
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations.
General
The following is a discussion and analysis of the historical results of
operations and financial condition of 360 Communications Company and
Subsidiaries (the "Company") and factors affecting the Company's financial
resources. This discussion should be read in conjunction with the consolidated
financial statements, including the notes thereto, included elsewhere in this
Report. This discussion contains forward-looking statements which are qualified
by reference to, and should be read in conjunction with, the Company's
discussion regarding forward-looking statements as set forth herein under
"Forward-Looking Statements."
Results of Operations
Customer Growth Rate
The Company's number of cellular customers increased to 2,583,000 in 1997
from 2,156,000 in 1996 and 1,502,000 in 1995, an increase of 19.8% and 43.6% in
1997 and 1996, respectively. In 1997 and 1996, the Company added 443,000 and
470,000 customers, respectively, through internal growth. In 1997, the Company
divested 16,000 customers through the sale of one of its consolidated entities.
In 1996, the Company added 185,000 customers through acquisitions. The Company's
penetration rate, which is the number of customers divided by the total
population in its licensed service areas, reached 10.7% at December 31, 1997,
compared with 8.9% at December 31, 1996. Annual penetration improvement from
internal growth was 1.8% in 1997 and 2.1% in 1996. Customer churn, the average
monthly rate of customers who discontinue service, was 1.88%, 1.86% and 1.81%
for the years ended December 31, 1997, 1996 and 1995, respectively.
Historically, the Company and the industry in general have experienced
significant customer growth during the fourth quarter. The Company attained
30.0% and 35.7% of its annual internal customer growth in the 1997 and 1996
fourth quarters, respectively. Revenue benefits associated with significant
fourth quarter customer growth, however, are not experienced until subsequent
quarters. During the fourth quarter of each year, the Company experiences
significant increases in expenses associated with the cost to acquire new
cellular customers. This is a result of the significant customer growth, which
causes a deterioration in fourth quarter operating margins. The Company believes
that more typical operating margins are experienced in subsequent periods which
reflect the revenue benefits of its significantly increased customer base.
Service Revenues
Service revenues primarily consist of charges for airtime, access fees,
roaming fees and other services. Service revenues increased in 1997 and 1996,
principally from growth in the number of cellular customers. Expanded
distribution, increased promotional activity, and improved consumer awareness of
wireless communications are key factors contributing to the Company's customer
growth. The industrywide trend toward lower negotiated roaming rates among
carriers and generally lower revenue per customer have partially offset the
revenue growth resulting from the Company's increased customer base. In
addition, acquisitions completed in the first and fourth quarters of 1996
contributed to increases in service revenues of approximately $83.3 million in
1997 and $46.8 million in 1996.
Consistent with the industry, the Company has achieved increased
penetration in the consumer market fueled by declining cellular telephone
equipment prices and increased promotional activities, an increased awareness of
wireless communications, widespread distribution channels in consumer-oriented
retail locations and expanded network coverage and capacity. The Company expects
this trend to continue. Service revenue per average customer per month was
$45.44 in 1997, $49.39 in 1996 and $53.01 in 1995. New customers generally use
less airtime than existing
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customers, causing the average service revenue per customer per month to
decline. Also impacting the decline in average service revenue per customer per
month was an increase in promotional activities in 1997. Promotional activities,
which include free minutes and free access, increased to 4.0% of service
revenues for the year ended December 31, 1997, from 2.2% of service revenues for
the year ended December 31, 1996. The Company expects service revenue per
average customer per month to continue to decline, at a slower rate, as
penetration rates continue to increase.
Roaming airtime minutes increased during 1997 and 1996 compared with the
corresponding prior year, while roaming revenues as a percent of service
revenues have declined. The Company expects roaming rates between carriers to
continue to decline, which may reduce revenues derived from cellular service
users who roam into the Company's systems. The Company expects roaming airtime
minutes to increase as reduced roaming rates between carriers ultimately are
passed on to customers.
Future revenue growth will be impacted by the Company's success in
maintaining customer growth in existing markets; generating additional revenue
from the increasing availability of a variety of enhanced services and products;
and acquiring additional cellular communications systems to further strengthen
the Company's existing regional market clusters. The growth rate of new
customers will decline as the Company's customer base grows. Revenue growth also
will be impacted by the Company's long distance and paging businesses. The
Company currently markets residential long distance and paging services in the
states in which the Company provides wireless service.
Cost of Service
Excluding the impact of roaming activities and expenses associated with the
long distance business, cost of service as a percent of service revenues was
7.4% in 1997, 8.1% in 1996 and 8.6% in 1995. Economies of scale, the effects of
renegotiated long distance contracts in 1996 and 1997 with Sprint Corporation
("Sprint"), and reduced interconnection rates paid to local telephone companies
were key factors favorably impacting the declining trend in cost of service as a
percent of service revenues. Long distance telecommunications and operator
services are provided to the Company by Sprint based on terms and conditions of
contracts governing such charges.
Roaming margins associated with the Company's customers roaming into other
carriers' markets declined in 1997 and 1996, resulting in an increase in cost of
service as a percent of service revenues. The decline in margins is attributable
to increased competitive pressures to reduce rates for such roaming traffic and
an increase in unbillable fraudulent roaming activities during the first quarter
of 1997. As part of a pricing simplification effort, the Company implemented new
roaming rate plans in early 1997 that contributed to the reduction in roaming
margins. The Company believes that the industrywide trend to reduce rates will
continue, thus stimulating an increase in cellular telephone usage, resulting in
an increase in roaming airtime. To the extent reduced retail rates stimulate
increased usage, and the Company is able to negotiate reduced wholesale roaming
rates with other carriers, the effects of discounted rates will be somewhat
mitigated.
Unauthorized usage of customer telephone numbers, commonly referred to in
the industry as cloning fraud, resulted in unbillable fraudulent roaming
activities that approximated 1.3%, 1.5% and 1.0% of service revenues in 1997,
1996 and 1995, respectively. In 1996, the increase in unbillable fraudulent
roaming activities was the result of a significant increase in the level of
fraud activity in several markets during the fourth quarter of 1996. The Company
responded quickly by implementing a combination of systems and technology to
prevent and manage the problem. Unbillable fraudulent roaming activities for the
three months ended December 31, 1997, were down to .25% of service revenues. The
Company believes it will continue to be impacted by fraudulent roaming
activities in the future and continues to proactively invest in new systems and
technologies to mitigate the occurrence of cellular fraud.
Cost to Acquire New Customers
Cost to acquire new customers represents sales, marketing and advertising
costs and losses on equipment sales for each new cellular customer added. The
cost to acquire a new cellular customer was $293, $302 and $280 for the years
ended December 31, 1997, 1996 and 1995, respectively.
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In 1997, advertising, promotional and other marketing expenses associated
with the promotion of the Company's brand name decreased by $11.5 million from
1996. This decrease was a result of additional costs in 1996 associated with the
introduction of the Company's new brand name. Also contributing to the decline
in cost to acquire was a continued reduction in the wholesale prices for
cellular phones and the transition of new customer sales from national dealers
to Company-owned retail outlets.
The cost to acquire a new cellular customer increased in 1996 compared with
1995 as a result of expenses associated with the new brand name.
Advertising, promotional and other marketing expenses associated with the
introduction and promotion of the Company's residential long distance business
increased by $5.2 million in 1997 compared with 1996.
To improve sales and reduce costs associated with acquiring new customers,
the Company continues to focus on expanding its lower-cost distribution
channels, including Company retail outlets and kiosks located in shopping malls.
Incremental sales costs at a Company retail store or kiosk are significantly
lower than commissions paid to national dealers. Although the Company intends to
continue to support its large dealer network, the Company has plans to increase
its own retail distribution channels. The Company has experienced little change
in churn levels, reflecting the Company's ability to manage the costs of
maintaining and growing its customer base. The Company is unable to anticipate
the impact of the cost to add new customers as savings associated with the
transition to the use of internal sales channels level off, the growth rate of
new customers declines and competition for local and national dealers
intensifies.
Other Operations Expense
Other operations expense as a percent of service revenues was 5.4% in 1997,
5.3% in 1996 and 5.1% in 1995. In 1997, maintenance salaries and wages increased
over 1996 as a result of an increase in the number of associates. Switch and
cell site maintenance expense increased in 1997 compared with the prior year as
a result of an increase in the number of cell sites. These increases, along with
the effects of an overall increase in the level of customer debt delinquencies
nationwide, more than offset realized economies of scale in 1997, causing an
increase in other operations expense as a percent of service revenues. Bad debt
expense as a percent of service revenues increased to 2.5% in 1997 from 2.3% in
1996 and 2.1% in 1995. This trend is attributable to the Company's continued
penetration into the consumer market, which is becoming a greater percent of the
Company's customer base. In 1996, nonrecurring charges and an overall increase
in the level of customer debt delinquencies offset realized economies of scale,
accounting for the increase in other operations expense as a percent of service
revenues. In 1996, the Company incurred approximately $700,000 for additional
maintenance expense caused by two major hurricanes and $900,000 of increased
expense for the testing of cell sites to ensure compliance with new
environmental protection laws.
General, Administrative and Other Expenses
General, administrative and other expenses as a percent of service revenues
were 23.9% in 1997, 25.0% in 1996 and 27.2% in 1995. The decreases in 1997 and
1996 were due to economies of scale realized as a result of customer growth. In
connection with the Company's spinoff from Sprint, the Company began to perform
certain functions previously provided by Sprint. See "Spinoff" for further
discussion. The undertaking of such functions did not have a significant impact
on the Company's operating expenses. The Company anticipates an ongoing trend of
decreased general, administrative and other expenses as a percent of service
revenues.
Depreciation and Amortization
Acquisitions of cellular communications systems generate intangible assets,
such as Federal Communications Commission ("FCC") license costs and goodwill,
which are amortized over 40 years. Amortization expense totaled $29.6 million,
$22.8 million and $19.2 million in 1997, 1996 and 1995, respectively. The
increase in amortization expense in 1997 compared with 1996 was the result of
additional amortization expense incurred by the Company in connection with the
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acquisition of cellular properties during the fourth quarter of 1996. The
Company periodically assesses the ongoing value of these intangible assets and
expects the carrying amounts to be fully recoverable.
Depreciation expense totaled $155.1 million, $124 million and $95.5 million
in 1997, 1996 and 1995, respectively. Depreciation as a percent of service
revenues was 12.0%, 11.8% and 12.1% in 1997, 1996 and 1995, respectively. The
increases in depreciation expense primarily were the result of increased capital
investment in the Company's cellular network. In 1997, economies of scale were
mitigated as a result of updating the network of cellular properties acquired
during the fourth quarter of 1996, causing depreciation expense as a percent of
service revenues to increase. The Company expects depreciation expense as a
percent of service revenues to decline as economies of scale are realized as
more customers are added to the existing network. The Company believes the
service lives on its existing analog technology are appropriate.
The Company continues to invest in analog and enhanced analog network
infrastructure to support customer growth and maintain the quality of its
service. The Company believes its networks have sufficient capacity to handle
its expected customer growth rate in the near term. In the future, the Company
intends to meet any capacity requirements through frequency planning, network
optimization and the deployment of additional network infrastructure. The
Company plans to accelerate its transition to digital technology on a
market-by-market basis to provide more minutes of use to customers at a lower
cost per minute. The Company believes this approach will stimulate usage, help
mitigate declining service revenue per average customer per month, and increase
service revenue growth going forward. In August 1996, the Company began offering
Code Division Multiple Access ("CDMA") digital technology in Las Vegas, Nevada.
In 1997, the Company initiated installation of digital technology in its greater
Raleigh, North Carolina, service area. The Company expects to begin commercially
offering digital service to its customers in Raleigh in the second quarter of
1998. The Company also plans to initiate installation of digital technology in
five additional markets in 1998.
Interest Expense
Interest expense increased in 1997 compared with 1996 because of an
increase in borrowing levels. Interest expense decreased in 1996 compared with
1995 because of decreases in interest rates and reduced borrowing levels as a
result of the recapitalization at the time of the Company's spinoff from Sprint.
See "Liquidity and Capital Resources" for additional information regarding the
Company's recapitalization. Prior to the spinoff, the Company borrowed from
Sprint, primarily to fund construction costs and start-up losses, at interest
rates based on prime plus 2.0% and a 30-day commercial paper rate. The average
interest rate was 7.2% in 1997, 7.1% in 1996 and 8.9% in 1995. See Note 6 of
Notes to Consolidated Financial Statements for a discussion of the Company's
current borrowings.
Minority Interests in Net Income of Consolidated Entities
Minority interests in net income of consolidated entities represents other
investors' interests in the operating results of cellular systems in which the
Company has a controlling interest. The increases in 1997, 1996 and 1995 were
due to improved operating results.
Equity in Net Income of Unconsolidated Entities
Equity in net income of unconsolidated entities represents the Company's
share of operating results of cellular systems in which the Company does not
have a controlling interest. Equity earnings increased in 1997, 1996 and 1995
primarily as a result of increased income generated by minority cellular
investments in markets that continue to mature. Income generated by minority
cellular investments may not continue to grow at the pace experienced in prior
years because of increased competition in the more highly populated urban
markets and the Company's strategy of exchanging its minority cellular
investments for increased ownership interests in its controlled markets or other
markets in which it could obtain control.
In addition, various lawsuits arising in the normal course of business are
pending against the cellular system entities in which the Company does not have
a controlling interest. Because the outcomes of such legal proceedings have not
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been determined, no provision for any liability that may result upon
adjudication of such litigation has been made in the consolidated financial
statements of the cellular system entity or the Company. In view of the
uncertainty regarding such litigation, there can be no assurance that the
outcome of these lawsuits will not have a material adverse effect on the
Company's investment in these entities or in its equity in the net income of
each entity.
Income Taxes
The Company's income tax expense for 1997, 1996 and 1995 was $73.8 million,
$57.8 million and $25.4 million, respectively. See Note 9 of Notes to
Consolidated Financial Statements for additional information regarding
differences that caused the effective income tax rates to vary from the
statutory federal income tax rates.
As of December 31, 1997, the Company had recorded deferred income tax
assets of $87.5 million, net of a $19.6 million valuation allowance. See Note 9
of Notes to Consolidated Financial Statements for information regarding the
sources that gave rise to these assets. The Company has determined that it is
more likely than not that these deferred tax assets, net of the valuation
allowance, will be realized based on current income tax laws and expectations of
future taxable income stemming from the reversal of deferred tax liabilities or
ordinary operations. Uncertainties surrounding income tax law changes, shifts in
operations between state taxing jurisdictions and future operating income levels
may, however, affect the ultimate realization of all or some of these deferred
income tax assets.
Competition
Cellular carriers compete primarily against the other facilities-based
cellular carrier in each market. However, companies with Personal Communications
Services ("PCS") licenses have begun to offer products and services in several
of the Company's service areas. The Company has prepared for this competitive
environment by enhancing its networks, expanding its service territory, offering
new features, products and services to its customers and simplifying its pricing
of services. During the third quarter of 1997, the Company introduced a new
service offering called the Bundled Value Pack, whereby customers may choose a
combination of cellular and long distance, cellular and paging, or all three
services and receive the selected services all on one bill. The Company believes
it will benefit from its position as an incumbent provider in the cellular
industry with a high quality network, extensive geographic footprint that is not
capacity constrained, strong distribution channels, superior customer service
and an experienced management team. However, there can be no assurance that
these measures will completely mitigate the pressures associated with the
expected increase in the level of competition.
Spinoff
On July 26, 1995, Sprint announced that its Board of Directors decided to
pursue a tax-free spinoff of the Company to Sprint shareholders ("spinoff"). In
the FCC auction of wireless PCS licenses, Sprint Spectrum LP won the rights to
several markets that overlap service territories operated by the Company. Under
FCC rules, Sprint was required to divest or reduce its cellular holdings in
certain markets to clear conflicts with the PCS licenses awarded to Sprint
Spectrum LP. For these reasons, Sprint and its Board of Directors decided to
pursue a spinoff of the cellular operations of Sprint. On March 7, 1996, the
spinoff was consummated.
Liquidity and Capital Resources
In conjunction with the spinoff from Sprint, the Company repaid $1.4
billion of intercompany debt to Sprint. The remaining intercompany debt, net of
receivables from affiliates, was contributed to the Company by Sprint as
additional paid-in capital. Funding for the repayment was derived from the
proceeds of $900 million of Senior Notes issued under an indenture ("1996
Indenture") and approximately $500 million of initial borrowings under the
Credit Facility ("Credit Facility"). In addition, a recapitalization of the
Company's common stock was effected pursuant to which the Company split the 10
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shares of issued and outstanding common stock into 116,733,983 new shares of
common stock to allow for the pro rata distribution of such stock to the common
shareholders of Sprint. This distribution was effected as a tax-free dividend.
In 1997, the Company filed a shelf registration with the Securities and
Exchange Commission, providing for the issuance, from time to time, of up to
$500 million in aggregate initial offering price of the Company's unsecured debt
securities and/or warrants to purchase debt securities ("Debt Securities"). The
net proceeds to be received by the Company from the sales of Debt Securities
will be available for general corporate purposes and may be used for the
repayment of short-term debt and borrowings under the Credit Facility and for
the funding of future acquisitions, capital expenditures and working capital
requirements.
In the first quarter of 1997, the Company issued $200 million in aggregate
principal amount of its 7.6% Senior Notes due 2009 under an indenture
("Indenture"). The net proceeds received by the Company from the sale of these
Debt Securities were used to repay a portion of the Company's long-term
indebtedness outstanding under the Credit Facility.
The Credit Facility has general and financial covenants that place certain
restrictions on the Company. Prior to the ICN Acquisition, the Credit Facility
was amended and restated to permit, among other things, the ICN Acquisition and
the increase in the Company's borrowing capacity from $800 million to $1
billion. See "Cash Flows - Investing Activities" for information regarding the
ICN Acquisition. On December 5, 1997, the Company entered into a second amended
and restated Credit Facility which relaxed the restrictions on certain
covenants, while extending the term of the Credit Facility to December 5, 2002.
The Company is limited with respect to: the making of payments (dividends and
distributions); the incurrence of certain liens; the sale of assets under
certain circumstances; entering into or otherwise permitting any subsidiary
distribution restrictions; certain transactions with affiliates; certain
consolidations, mergers and transfers; and the use of loan proceeds. In
addition, the Credit Facility may limit the aggregate amount of additional
borrowings that can be incurred by the Company. At December 31, 1997, the
Company had $600 million of borrowings outstanding under the Credit Facility and
additional borrowing capacity of $308 million under the terms of the Credit
Facility.
The 1996 Indenture has general and financial covenants similar to the
Credit Facility. However, these covenants, except for the limitation on liens,
have been suspended while the Company's public debt is rated investment grade
(BBB-) by Standard & Poor's and Duff & Phelps.
Holding Company Structure
The Company's operations are conducted largely through subsidiary
corporations and partnerships. In the case of subsidiary corporations, those
entities are wholly owned, directly or indirectly, by the Company and are not
restricted in any way from paying dividends or other payments to the Company. In
addition, the Company's subsidiaries are not permitted under the Credit
Facility, subject to certain exceptions, to restrict distributions to the
Company. In the case of partnerships, to the extent funds are available for
distribution, distributions are generally required under the partnership
agreements, except to the extent such funds are required for additional capital
investments in the partnership. However, because the Company does not control
the capital structure of certain partnerships in which it holds minority
interests, it is possible that such partnerships may have entered into loan
agreements or other contractual arrangements that restrict or limit
distributions to the partners of such partnerships.
Cash Flows - Operating Activities
Operating cash flow increases in 1997 and 1996 reflect improved operating
results. During 1996, operating cash flows were impacted by additional
advertising and promotional and other marketing expenses associated with the
introduction and promotion of the Company's new brand name. Although future cash
flows will continue to be impacted by costs associated with the promotion of the
Company's new brand name, the Company expects cash flows generated by operating
activities to continue to increase.
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Cash Flows - Investing Activities
Capital expenditures were $281.3 million, $300.1 million and $323.7 million
in 1997, 1996 and 1995, respectively. The decrease in capital expenditures in
1997 and 1996, compared with the corresponding prior year, was a result of the
Company's maturing cellular network. Other factors contributing to the decrease
in capital expenditures in 1997 were the efficiencies created through network
design and implementation, improved pricing and concessions from vendors and the
postponement of the construction of certain cell sites until 1998 because of
local community zoning issues. In previous years, the Company concentrated on
satisfying the FCC's requirements for the build out of cellular systems relating
to the expansion of the geographic footprint or coverage area of Company-held
licenses, in addition to capital investment to support customer growth. With the
geographic areas of its licensed markets essentially covered, the Company
currently focuses on capital investment to support customer growth and on
improving customer call quality. In 1997, the Company initiated installation of
CDMA digital technology in the greater Raleigh, North Carolina, service area.
The Company expects to begin commercially offering digital service to its
customers in Raleigh in the second quarter of 1998. The Company also plans to
initiate installation of digital technology in five additional markets in 1998.
On November 1, 1996, the Company completed its acquisition of Independent
Cellular Network, Inc. and affiliated companies (the "ICN Acquisition") which
own and operate cellular licenses and related systems in Kentucky, Ohio,
Pennsylvania and West Virginia, providing cellular service to approximately
140,000 customers in 20 markets, representing an estimated 3.3 million potential
customers. The purchase price was approximately $519 million, comprising
6,500,000 shares of the Company's common stock, $122 million in aggregate
principal amount of the Company's subordinated promissory notes and the
Company's assumption of $240 million in senior debt, which was immediately
refinanced with borrowings under the Credit Facility. The remaining portion of
the purchase price was paid in cash. To achieve cellular system compatibility
and standard customer functionality, it was necessary for the Company to replace
the acquired cell site equipment and switches. The Company began replacing
equipment in 1996 and completed the switch-out in 1997.
On a limited basis, the Company has increased its ownership interests in
certain of its controlled markets. To the extent feasible, the Company intends
to continue pursuing opportunities to exchange some or all of its minority
investments in cellular communications systems for increased ownership interests
in its controlled markets or for ownership interests in new markets in which it
could obtain control. See Note 3 of Notes to Consolidated Financial Statements
for a discussion of acquisitions and divestitures.
Cash Flows - Financing Activities
In 1995, cash provided by financing activities principally reflected
borrowings from Sprint. Following the spinoff, capital to meet funding
requirements was no longer available from Sprint. In conjunction with the
spinoff, the Company repaid $1.4 billion of intercompany debt to Sprint. The
remaining intercompany debt was contributed to the Company by Sprint as
additional paid-in capital. Funding for the repayment was derived from proceeds
of the Company's Senior Notes issued under the 1996 Indenture and initial
borrowings under the Credit Facility. In conjunction with the ICN Acquisition,
the Company issued $122 million in aggregate principal amount of the Company's
subordinated promissory notes and assumed $240 million of senior debt which was
immediately refinanced under the Credit Facility. The subordinated promissory
notes have general and financial covenants that have been suspended while the
Company's public debt is rated investment grade (BBB-) by Standard & Poor's and
Duff & Phelps.
In 1996, the Company repurchased shares of its common stock on the open
market for purposes of distributing shares under the Sprint Employees Stock
Purchase Plan, which terminated on June 30, 1996, and issuing common stock in
conjunction with stock option exercises. See Note 8 of Notes to Consolidated
Financial Statements for information regarding the Sprint Employees Stock
Purchase Plan.
In 1997, the Company's Board of Directors authorized the repurchase of up
to 3 million shares of the Company's common stock through May 1, 1998. The
shares may be purchased from time to time on the open market at prevailing
prices, subject to market conditions. As of December 31, 1997, the Company had
purchased approximately 2.1 million shares of the Company's common stock at an
average price of $17 per share. The
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purchase of treasury shares did not have a significant effect on the Company's
earnings per share calculation.
As part of its cash management program, the Company also incurs short-term
borrowings based on market interest rates to support its daily cash
requirements. The aggregate amount of these borrowings is limited to $100
million under certain debt covenants.
Liquidity
In August 1995, four independent dealers filed a lawsuit in the Court of
Common Pleas of Greenville County, South Carolina, alleging that the Company
breached its dealer agreements with the plaintiffs and engaged in unfair trade
practices. In particular, the plaintiffs alleged that the Company discontinued
the practice of allowing the plaintiffs to sell cellular telephones out of the
Company's inventory, and instead required the plaintiffs to maintain their own
inventories and sold cellular telephones to the public at prices lower than the
prices that the Company charged to the plaintiffs. On November 21, 1997, a jury
awarded the plaintiffs $1.9 million in compensatory damages and $10 million in
punitive damages. The Company has filed an appeal with the South Carolina
Supreme Court seeking to reverse the decision. The Company believes that it
acted in accordance with the dealer agreements and that the decision is wholly
unwarranted by the facts.
The Company is party to various other legal proceedings in the ordinary
course of business. Although the ultimate resolution of these various
proceedings cannot be ascertained, management of the Company does not believe
that such proceedings, individually or in the aggregate, will have a material
adverse effect on the results of operations or financial position of the
Company.
Capital Requirements
Substantial capital is required to expand and operate the Company's
existing cellular systems and to acquire interests in additional cellular
systems. The Company has increased borrowings to the extent its existing cash
needs have not been met through existing cash resources and cash flows from
operations. Prior to the spinoff, the Company met its funding requirements
through borrowings from Sprint. Subsequent to the spinoff, existing cash
resources, internally generated funds and borrowings have been used to meet the
Company's capital requirements.
The Company expects to make capital expenditures, excluding acquisitions,
of approximately $270 million in 1998. The Company expects cash flows from
operations to substantially fund its capital expenditure program. In addition,
the Company can utilize existing cash resources, borrowings under the Credit
Facility and the issuance of Debt Securities to meet these funding requirements.
These expenditures will be made to expand and enhance existing cellular systems
and to deploy digital technology.
The Company expects that it may need to raise additional funds to finance
acquisition activities. Such acquisition activities may include acquisitions of
new cellular communications systems or additional investments in cellular
communications systems in which the Company already holds an interest. An
agreement that was designed to preserve the tax-free status of the Company's
spinoff from Sprint, and which imposed certain limitations associated with
equity transactions, expired on March 7, 1998. Accordingly, the Company is no
longer restricted as to the aggregate amount of additional common stock that it
can issue.
The Company believes it will have the needed access to the capital markets
on suitable terms and that, together with borrowings under the Credit Facility,
the issuance of Debt Securities and net cash provided by operations, it will
have sufficient capital to meet its projected funding requirements for
operations in 1998 and thereafter. The Company currently does not intend to seek
funding from other sources during 1998. There can be no assurance that access to
the capital markets can be obtained in amounts and on terms adequate to meet its
objectives or that the borrowings or net cash from operations will be adequate
to meet the Company's projected funding requirements.
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General Hedging Policies
The Company utilizes certain derivative financial instruments to manage
exposure to interest rate risk, but not for trading purposes. During 1997 and
1996, the use of such instruments was limited to interest rate swap agreements.
The Company does not take speculative positions or create an exposure in an
effort to benefit from market fluctuations. As of December 31, 1997 and 1996,
any potential loss or exposure related to interest rate swap agreements was not
material to overall operations, financial condition and liquidity.
The Company's earnings are affected by changes in interest rates as a
result of its variable rate Credit Facility borrowings. However, as a result of
the purchase of interest rate swap agreements, the effects of interest rate
changes are limited. If market interest rates for those borrowings average 2.0%
more in 1998 than in 1997, the Company's interest expense, after considering the
effects of its interest rate swap agreements, would increase, and income before
taxes would decrease by $8 million. Comparatively, if market interest rates for
its Credit Facility borrowings averaged 2.0% more in 1997 than in 1996, the
Company's interest expense, after considering the effects of its interest rate
swap agreements, would increase, and income before taxes would decrease by $11.6
million. These amounts are determined by considering the impact of the
hypothetical interest rates on the Company's borrowing cost and interest rate
swap agreements. These analyses do not consider the effects of the reduced level
of overall economic activity that could exist in such an environment. However,
because of the uncertainty of the specific actions that would be taken and their
possible effects, the sensitivity analysis assumes no changes in the Company's
financial structure. See Note 6 of Notes to Consolidated Financial Statements
for more information related to borrowings and interest rate swap agreements.
Dividend Policy
The Company currently does not anticipate paying cash dividends on its
common stock in the foreseeable future.
Impact of Year 2000
The "Year 2000 Issue" is the result of computer programs having been
written using two digits rather than four to define the applicable year.
Computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or cause disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices or engage in similar
business activities.
Based on a recent assessment, the Company believes that with modifications
to existing software and conversions to new software, the Year 2000 Issue will
not pose significant operational problems for its computer systems. However, if
such modifications and conversions are not made, or not made in a timely manner,
the Year 2000 Issue could have a material impact on the operations of the
Company. The Company has determined it has no exposure to contingencies related
to the Year 2000 Issue for the products and services it provides.
The Company anticipates completing the Year 2000 project no later than
December 31, 1998, which is prior to any anticipated impact on its operating
systems. The Company has not incurred incremental costs to date and believes the
total cost of the year 2000 project will not have a material effect on its
results of operations.
Impact of Recently Issued Accounting Standards
In June 1997, Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income", was issued. This statement requires that all
items recognized under accounting standards as components of comprehensive
income be reported in a full set of general purpose financial statements. The
Company will adopt SFAS No. 130 in the first quarter of 1998 and does not
believe the effect of adoption will be material.
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In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued. This statement requires companies to
report financial and descriptive information about their reportable operating
segments. Generally, companies are required to report financial information on
the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments. The Company will adopt SFAS No.
131 for financial statements as of and for the year ended December 31, 1998, and
does not believe the effect of adoption will be material.
Recent Developments
On January 13, 1998, the Company issued $100 million in aggregate principal
amount of its 6.65% Senior Notes due 2008. The net proceeds received by the
Company from the sale of these Debt Securities were used to repay a portion of
the Company's long-term indebtedness outstanding under the Credit Facility.
On February 27, 1998, the divestiture of the Company's 27.9% interest in
the Omaha, Nebraska, cellular market was completed through the sale of its
interest in the Omaha Cellular General Partnership. This divestiture was
initiated by the managing partner's exercise of an option to acquire the
Company's interest pursuant to a preexisting agreement. Also on February 27,
1998, the Company acquired a minority interest in one of its controlled markets.
On March 16, 1998, the Company entered into an Agreement and Plan of Merger
with ALLTEL Corporation ("ALLTEL") and Pinnacle Merger Sub, Inc., a wholly owned
subsidiary of ALLTEL, pursuant to which each outstanding share of the Company's
common stock will be converted into .74 shares of ALLTEL common stock, par value
$1.00 per share. The transaction will be accounted for as a pooling of
interests. Upon consummation of the merger, the Company will become a wholly
owned subsidiary of ALLTEL. Consummation of the merger is subject to certain
conditions, including the approval by the respective shareowners of the Company
and ALLTEL and the receipt of required regulatory approvals. Pending the receipt
of such approvals, the Company expects to complete the merger in the third
quarter of 1998.
Forward-Looking Statements
When used in this Report, the words "intends," "expects," "plans,"
"estimates," "projects," "believes," "anticipates," and similar expressions are
intended to identify forward-looking statements. Specifically, statements
included in this Report that are not historical facts, including statements
about the Company's beliefs and expectations about continued market and industry
growth, and ability to maintain existing churn, customer growth and increased
penetration rates, are forward-looking statements. Such statements are subject
to risks and uncertainties that could cause actual results or outcomes to differ
materially. Such risks and uncertainties include, but are not limited to, the
degree to which the Company is leveraged and the restrictions imposed on the
Company under its existing debt instruments that may adversely affect the
Company's ability to finance its future operations, to compete effectively
against better capitalized competitors and to withstand downturns in its
business or the economy generally; the continued downward pressure on the prices
charged for cellular equipment and services resulting from increased competition
in the Company's markets; the lack of assurance that the Company's ongoing
network improvements and scheduled implementation of digital technology in its
markets will be sufficient to meet or exceed the capabilities and quality of
competing networks; the effect on the Company's operations and financial
performance of changes in the regulation of cellular activities; the degree to
which the Company incurs significant costs as a result of cellular fraud; a
significant delay in the expected closing of the proposed merger between the
Company and ALLTEL Corporation; and the other factors discussed in the Company's
filings with the Securities and Exchange Commission, including the factors
discussed under the heading "Certain Risk Factors" in the Information Statement
set forth as Exhibit 99 to the Company's Form 10 (File No. 1-14108), which
section is hereby incorporated by reference herein. Forward-looking statements
included in this Report speak only as of the date hereof, and the Company
undertakes no obligation to revise or update such statements to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
34
<PAGE>
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareowners
360 Communications Company
We have audited the accompanying consolidated balance sheets of 360
Communications Company and Subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, shareowners' equity, and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed in the index at
Item 14 (a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. We did not audit the
financial statements of GTE Mobilnet of South Texas Limited Partnership, New
York SMSA Limited Partnership, Orlando SMSA Limited Partnership and Chicago MSA
Limited Partnership, equity investees of the Company, for which the Company's
investment in these partnerships is $191,275,000 and $121,654,000 at December
31, 1997 and 1996, respectively, and the Company's equity in the net income of
these partnerships is $48,344,000, $39,644,000 and $32,753,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. Those financial statements
were audited by other auditors whose reports have been furnished to us. Our
opinion, insofar as it relates to data included for such partnerships, is based
solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits and the reports of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of 360 Communications
Company and Subsidiaries at December 31, 1997 and 1996, and the consolidated
results of its operations and cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Chicago, Illinois
March 6, 1998
35
<PAGE>
REPORT OF OTHER INDEPENDENT PUBLIC ACCOUNTANTS
To GTE Mobilnet of South Texas Limited Partnership:
We have audited the accompanying balance sheets of the GTE Mobilnet of South
Texas Limited Partnership (a Delaware limited partnership) as of December 31,
1997 and 1996, and the related statements of operations, changes in partners'
capital, and cash flows for the years then ended. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GTE Mobilnet of South Texas
Limited Partnership as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 13, 1998
36
<PAGE>
REPORT OF OTHER INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of the
Chicago SMSA Limited Partnership:
We have audited the balance sheets of the CHICAGO SMSA LIMITED PARTNERSHIP (an
Illinois partnership) as of December 31, 1997 and 1996, and the related
statements of income, partners' capital and cash flows for the years then ended;
such financial statements are not included separately herein. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Chicago SMSA Limited
Partnership as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 16, 1998
37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of the New York SMSA Limited Partnership
We have audited the accompanying balance sheets of the New York SMSA Limited
Partnership (the Partnership) as of December 31, 1997 and 1996, and the related
statements of income, changes in partners' capital and cash flows for the years
then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the New York SMSA Limited
Partnership as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
February 13, 1998
38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of the Orlando SMSA Limited Partnership
We have audited the accompanying consolidated balance sheet of the Orlando SMSA
Limited Partnership as of December 31, 1997, and the related consolidated
statements of income, changes in partners' capital and cash flows for the year
then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Orlando SMSA
Limited Partnership as of December 31, 1997, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Atlanta, Georgia
March 6, 1998
39
<PAGE>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
---------------------------
ASSETS 1997 1996
------ ------------ ------------
Current Assets
Cash and cash equivalents $ 3,471 $ 2,554
Accounts receivable, less allowances
of $6,602 and $5,730, respectively 100,472 102,483
Other receivables 26,981 27,090
Unbilled revenue 35,618 35,712
Inventory 34,354 35,908
Deferred income taxes 15,220 8,462
Prepaid expenses and other 14,051 16,634
------------ ------------
Total current assets 230,167 228,843
------------ ------------
Property, plant and equipment 1,750,097 1,499,407
Less: accumulated depreciation 561,140 415,981
------------ ------------
Property, plant and equipment, net 1,188,957 1,083,426
------------ ------------
Investments in unconsolidated entities 459,669 349,231
Intangibles, net 1,045,007 1,136,587
Other assets 18,124 13,982
------------ ------------
Total assets $ 2,941,924 $ 2,812,069
============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
Current Liabilities
Trade accounts and other payables $ 241,127 $ 227,654
Short-term borrowings 18,150 43,750
Advance billings 31,779 28,314
Accrued taxes 17,846 17,951
Accrued agent commissions 11,923 12,089
Other 46,386 21,090
------------ ------------
Total current liabilities 367,211 350,848
------------ ------------
Long-term debt 1,825,347 1,699,778
------------ ------------
Deferred Credits and Other Liabilities
Deferred income taxes 60,470 113,005
Postretirement and other benefit obligations 6,347 5,855
------------- ------------
Total deferred credits and other liabilities 66,817 118,860
------------- ------------
Minority interests in consolidated entities 173,248 180,083
------------- ------------
Shareowners' Equity
Common stock ($.01 par value; 1 billion shares
authorized; issued and outstanding shares
121,267,127 in 1997 and 123,308,921 in 1996) 1,233 1,233
Additional paid-in capital 774,938 773,472
Accumulated deficit (229,437) (310,932)
Treasury stock, at cost (2,097,021 shares in
1997 and 55,227 shares in 1996) (37,433) (1,273)
------------- ------------
Total shareowners' equity 509,301 462,500
------------- ------------
Total liabilities and shareowners' equity $2,941,924 $ 2,812,069
============= ============
The accompanying Notes are an integral part of the
Consolidated Financial Statements.
40
<PAGE>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Year Ended December 31,
------------------------------------
1997 1996 1995
----------- ----------- ----------
OPERATING REVENUES
Service revenues $1,296,669 $1,052,726 $ 789,459
Equipment sales 50,503 43,146 44,956
----------- ----------- ----------
Total operating revenues 1,347,172 1,095,872 834,415
----------- ----------- ----------
OPERATING EXPENSES
Cost of service 158,309 99,745 68,223
Cost of equipment sales 116,456 104,327 109,441
Other operations expense 70,561 55,776 40,591
Sales, marketing and advertising expenses 232,962 206,147 141,505
General, administrative and other expenses 310,340 263,191 214,536
Depreciation and amortization 184,702 146,841 114,731
----------- ----------- ----------
Total operating expenses 1,073,330 876,027 689,027
----------- ----------- ----------
OPERATING INCOME 273,842 219,845 145,388
Interest expense (131,589) (106,364) (127,240)
Minority interests in net income
of consolidated entities (50,880) (46,622) (34,269)
Equity in net income of
unconsolidated entities 60,681 50,234 40,016
Other income (expense), net 3,270 255 (185)
----------- ----------- ----------
Income before income taxes 155,324 117,348 23,710
Income tax expense 73,829 57,829 25,405
----------- ----------- ----------
Net income (loss) $ 81,495 $ 59,519 $ (1,695)
=========== =========== ==========
Basic and diluted earnings (loss)
per share $ 0.67 $ 0.50 $ (0.01)
=========== =========== ==========
Weighted average shares
outstanding 122,339 117,917 116,706
=========== =========== ==========
The accompanying Notes are an integral part of the
Consolidated Financial Statements.
41
<PAGE>
<TABLE>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
For the Year Ended December 31,
------------------------------------
1997 1996 1995
---------- ------------ ----------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 81,495 $ 59,519 $ (1,695)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 184,702 146,841 114,731
Deferred income taxes 40,910 36,230 36,267
Gain on the sale of cellular investments (3,029) -- --
Equity in net income of unconsolidated
entities, net of distributions (22,903) (27,838) (7,206)
Minority interests in net income of
consolidated entities 50,880 46,622 34,269
Changes in operating assets and liabilities
Receivables, net (2,161) (28,748) (20,610)
Other current assets 5,058 (23,222) 7,592
Trade accounts and other payables 21,301 110,146 3,420
Accrued expenses and other
current liabilities 33,379 (3,984) 6,365
Noncurrent assets and liabilities, net (5,007) (685) 12,007
Other, net 3,080 4,392 (1,847)
---------- ------------ ----------
Net Cash Provided by Operating Activities 387,705 319,273 183,293
---------- ------------ ----------
Investing Activities
Capital expenditures (281,313) (300,123) (323,651)
Acquisitions and divestitures (56,629) (352,533) (1,142)
Investments in unconsolidated entities and other (80,928) (14,890) (3,743)
---------- ------------ ----------
Net Cash Used for Investing Activities (418,870) (667,546) (328,536)
---------- ------------ ----------
Financing Activities
Net borrowings (payments) under bank revolving
credit facility (80,000) 680,000 --
Proceeds from long-term debt 200,000 900,000 --
Debt issuance costs (1,609) (15,229) --
Net short-term borrowings (payments) (25,600) 43,750 --
Purchases of common stock for treasury (36,401) (3,427) --
Increase in advances from affiliates -- 135,892 158,482
Contributions from minority investors 100 5,636 7,228
Distributions to minority investors (25,358) (14,849) (6,971)
Repayment of advances from affiliates -- (1,400,000) --
Other, net 950 31 --
---------- ------------ ----------
Net Cash Provided by Financing Activities 32,082 331,804 158,739
---------- ------------ ----------
Increase (Decrease) in Cash and Cash Equivalents 917 (16,469) 13,496
Cash and Cash Equivalents at Beginning of Year 2,554 19,023 5,527
---------- ------------ ----------
Cash and Cash Equivalents at End of Year $ 3,471 $ 2,554 $ 19,023
========== ============ ==========
</TABLE>
The accompanying Notes are an integral part of the
Consolidated Financial Statements.
42
<PAGE>
<TABLE>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
(In thousands, except share amounts)
<CAPTION>
Common Stock Treasury Stock Additional Total
----------------------- --------------------- Paid-In Accumulated Shareowners'
Shares Amount Shares Amount Capital Deficit Equity
------------- --------- ----------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 10 $ 11,541 - $ - $ 360,978 $ (368,756) $ 3,763
Net loss - - - - - (1,695) (1,695)
------------- --------- ----------- --------- ---------- ------------ ------------
Balance at December 31, 1995 10 11,541 - - 360,978 (370,451) 2,068
Net income - - - - - 59,519 59,519
Capital contributions by Sprint
Corporation in conjunction
with spinoff - - - - 253,160 - 253,160
Recapitalization of stock
pursuant to spinoff from
Sprint Corporation 116,733,973 (10,374) - - 10,374 - -
Shares issued for acquisition 6,500,000 65 - - 150,248 - 150,313
Treasury stock, net (55,227) - 55,227 (1,273) - - (1,273)
Other, net 130,165 1 - - (1,288) - (1,287)
------------- --------- ----------- --------- ---------- ------------ ------------
Balance at December 31, 1996 123,308,921 1,233 55,227 (1,273) 773,472 (310,932) 462,500
Net income - - - - - 81,495 81,495
Treasury stock, net (2,041,794) - 2,041,794 (36,160) (69) - (36,229)
Other, net - - - - 1,535 - 1,535
------------- --------- ----------- --------- ---------- ------------ ------------
Balance at December 31, 1997 121,267,127 $ 1,233 2,097,021 $(37,433) $ 774,938 $ (229,437) $ 509,301
============= ========= =========== ========= ========== ============ ============
</TABLE>
The accompanying Notes are an integral part of the
Consolidated Financial Statements.
43
<PAGE>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Consolidation and Presentation
360 Communications Company and its subsidiaries (the "Company")
provide wireless voice and data telecommunications services. The Company also
markets residential long distance and paging services in the states in which the
Company provides wireless service. The Company operates as a general and limited
partner and majority owner of cellular systems in various metropolitan and rural
service areas and as a limited minority partner or manager in other cellular
systems. The Company operates in four regions in the United States:
Mid-Atlantic, Midwest, Southeast and West.
The Company was a wholly owned subsidiary of Centel Corporation, a wholly
owned subsidiary of Sprint Corporation ("Sprint"). On March 7, 1996, Sprint
completed the spinoff of the Company to Sprint shareholders through a pro rata
distribution of all of the common stock of the Company ("spinoff"). For further
discussion of the spinoff, see Note 2.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned and majority-owned subsidiaries. The assets,
liabilities and results of operations of entities (both corporations and
partnerships) in which the Company has a controlling interest have been
consolidated. The ownership interests of noncontrolling owners in such entities
are reflected as minority interests. The Company accounts for all other
investees using the equity method of accounting. All significant intercompany
accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings per Share." SFAS No. 128 requires companies to
disclose basic and diluted earnings per share. Basic earnings per share amounts
were calculated based on the weighted average number of common shares
outstanding and excludes common stock equivalents from the calculation. Because
of the relative insignificance of the Company's common stock equivalents,
diluted earnings per share amounts were not affected.
Basic earnings per share amounts were computed using the weighted average
number of shares outstanding, excluding common stock equivalents, totaling
122,338,741 and 117,917,484 for the years ended December 31, 1997 and 1996,
respectively. Diluted earnings per share amounts were computed using the
weighted average number of shares outstanding, including common stock
equivalents, totaling 122,398,834 and 118,135,881 for the years ended December
31, 1997 and 1996, respectively. Options to purchase approximately 1,991,000 and
1,363,000 shares of common stock at December 31, 1997 and 1996, respectively,
were excluded from the computation of diluted earnings per share because the
effect was antidilutive. In 1995, loss per share amounts were based on the
weighted average number of Sprint shares outstanding, adjusted for a conversion
ratio of one share of the Company's common stock to three shares of Sprint
common stock.
44
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Revenue Recognition
The Company earns revenues by providing access to its cellular system
("access revenue"), for usage of its cellular system ("airtime revenue"), for
long distance calls placed by the Company's customers and those of other
carriers within the Company's service area ("long distance"), and for providing
service to customers from other cellular systems who are traveling through the
service area ("roaming revenue"). Access revenue is billed one month in advance
and is recognized when earned. Airtime revenue, roaming revenue and long
distance revenue are recognized when the service is rendered. Other service
revenues are recognized after services are performed and include connection and
installation revenues. Equipment sales are recognized on delivery of the
equipment to the customer.
Advertising Costs
The Company expenses the costs of advertising as incurred. Advertising
expense for the years ended December 31, 1997, 1996 and 1995 was $53,726,000,
$55,491,000 and $27,337,000, respectively.
Cash
As part of its cash management program, the Company utilizes controlled
disbursement banking arrangements. Outstanding checks in excess of cash balances
totaled $41,384,000 and $34,924,000 at December 31, 1997 and 1996, respectively,
and are classified as trade accounts and other payables in the accompanying
Consolidated Balance Sheets. Sufficient funds were available to fund these
outstanding checks when presented for payment.
Inventory
Inventory consists of cellular telephone and certain accessory equipment
held for resale and is stated at the lower of cost (principally first in, first
out method) or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, including labor and
overhead expenses associated with construction. Cost includes capitalized
interest on funds borrowed to finance construction and is amortized over the
lives of the related assets. Capitalized interest for the years ended December
31, 1997, 1996 and 1995 was $2,425,000, $2,234,000 and $1,553,000, respectively.
Depreciation is computed by applying the straight-line method over the estimated
service lives for depreciable plant and equipment.
Investments in Unconsolidated Entities
Minority partnership investments include the excess of the purchase price
over the underlying net book value of cellular partnerships of $284,553,000 and
$232,014,000 as of December 31, 1997 and 1996, respectively. Such excess, which
relates to Federal Communications Commission ("FCC") licenses or goodwill, is
generally being amortized on a straight-line basis over 40 years. Accumulated
amortization aggregated $48,089,000 and $46,295,000 as of December 31, 1997 and
1996, respectively.
Amortization expense for the years ended December 31, 1997, 1996 and 1995
was $6,480,000, $5,798,000 and $5,770,000, respectively, and is included in
equity in net income of unconsolidated entities in the accompanying Consolidated
Statements of Operations.
45
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Intangibles
The Company has acquired identifiable intangible assets, as well as
goodwill, through its acquisitions of interests in various cellular systems. The
cost of acquired entities is allocated to identifiable assets at the date of the
acquisition and the excess of the total purchase price over the amounts assigned
to identifiable assets is recorded as goodwill. Intangible assets related to the
acquisition of entities in which the Company does not have a controlling
interest are included in investments in unconsolidated entities.
The FCC issues licenses that enable cellular carriers to provide service in
specific cellular geographic service areas. The FCC grants licenses for terms of
up to 10 years and generally grants renewals if the licensee has complied with
its obligations under the Communications Act of 1934. In 1993, the FCC adopted
specific standards to apply to cellular renewals, concluding that it would award
a renewal expectancy to a cellular licensee that meets certain standards of past
performance. Historically, the FCC has granted license renewals routinely. The
Company believes that it has met and will continue to meet all requirements
necessary to secure renewal of its cellular licenses.
Intangible assets are being amortized over 40 years. Accumulated
amortization related to acquisitions of controlling interests in cellular
systems aggregated $183,375,000 and $153,908,000 as of December 31, 1997 and
1996, respectively. Amortization expense for the years ended December 31, 1997,
1996 and 1995 was $29,576,000, $22,817,000 and $19,191,000, respectively.
The ongoing value and remaining useful life of intangible assets are
subject to periodic evaluation and the Company currently expects the carrying
amounts to be fully recoverable. Should events and circumstances indicate that
intangible assets might be impaired, an undiscounted cash flow methodology would
be used to determine whether an impairment loss would be recognized.
Supplemental Cash Flow Information
The Company paid interest of $124,798,000, $78,124,000 and $127,240,000 for
the years ended December 31, 1997, 1996 and 1995, respectively. Income taxes of
$27,392,000, $25,707,000 and $(5,500,000) were paid (received) by the Company in
1997, 1996 and 1995, respectively.
Income Taxes and Tax Sharing Arrangement
Deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for tax purposes. The Company was included in the consolidated
federal income tax return of Sprint through March 7, 1996. Under a tax sharing
arrangement in effect prior to the spinoff, Sprint paid the Company for the
utilization of net operating losses included in the consolidated tax return,
even if such losses and credits could not have been used if the Company had
filed on a separate return basis.
Stock Option Plans
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." However, in accordance with the provisions of SFAS No. 123, the
Company continues to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" in accounting for its stock option
plans and, accordingly, does not recognize compensation cost. See Note 8 for a
summary of the pro forma effects to reported net income and earnings per share
if the Company had elected to recognize compensation cost based on the fair
value of the options granted at the date of grant, as prescribed by SFAS No.
123.
46
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Concentrations of Credit Risk
To the extent that the Company's customers become delinquent, collection
activities commence. No single customer is large enough to pose a significant
financial risk to the Company. The Company maintains an allowance for losses
based on the expected collectibility of accounts receivable. Credit losses have
been within management's expectations.
Impact of Recently Issued Accounting Standards
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued.
This statement requires that all items recognized under accounting standards as
components of comprehensive income be reported in a full set of general purpose
financial statements. The Company will adopt SFAS No. 130 in the first quarter
of 1998 and does not believe the effect of adoption will be material.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued. This statement requires companies to
report financial and descriptive information about their reportable operating
segments. Generally, companies are required to report financial information on
the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments. The Company will adopt SFAS No.
131 for financial statements as of and for the year ended December 31, 1998, and
does not believe the effect of adoption will be material.
2. Spinoff
On July 26, 1995, Sprint announced that its Board of Directors had decided
to pursue a tax-free spinoff of the Company to Sprint shareholders. In the FCC
auction of wireless Personal Communications Services ("PCS") licenses, Sprint
Spectrum LP won the rights to several markets that overlap service territories
operated by the Company. Under FCC rules, Sprint was required to divest or
reduce its cellular holdings in certain markets to clear conflicts with the PCS
licenses awarded to Sprint Spectrum LP. For these reasons, Sprint and its Board
of Directors decided to pursue a spinoff of the cellular operations.
On March 7, 1996, the spinoff was consummated. In conjunction with the
spinoff, the Company repaid $1.4 billion of intercompany debt to Sprint. The
remaining intercompany debt, net of receivables from affiliates, was contributed
to the Company by Sprint as additional paid-in capital. Funding for the
repayment was derived from the proceeds of $900 million of senior notes issued
under an indenture and approximately $500 million of initial borrowings under a
revolving credit facility ("Credit Facility") with a number of banks and
institutional lenders. In addition, a recapitalization of the Company's common
stock was effected pursuant to which the Company split the 10 shares of issued
and outstanding common stock into 116,733,983 new shares of common stock to
allow for the pro rata distribution of such stock to the common shareholders of
Sprint. This distribution was effected as a tax-free dividend.
3. Acquisitions and Divestitures
During the first and second quarters of 1997, the Company divested
ownership interests in certain unconsolidated entities as well as in one of its
controlled markets. During the second quarter of 1997, the Company and BellSouth
Corporation ("BellSouth") combined their interests in two partnerships that own
and control cellular licenses and operations in Richmond, Virginia, and Orlando,
Florida. The resulting partnership is owned approximately 75% by BellSouth and
25% by the Company, with the Company assuming management responsibilities of the
cellular operations in Richmond. In connection with this transaction, the
Company contributed $80 million to the resulting partnership. In 1997, the
Company acquired minority interests in 15 of its controlled markets, which
increased its ownership interest to 100% in 10 of those markets.
47
<PAGE>
3. Acquisitions and Divestitures (continued)
On January 31, 1996, the Company purchased additional partnership interests
in 360 Communications Company of Ft. Walton Beach Limited Partnership
and 360 Communications Company of Tallahassee Limited Partnership. Also
on January 31, 1996, the Company purchased an operating license and related
cellular assets in the North Carolina RSA No. 14 market. On February 23, 1996,
the Company acquired an operating license and related assets in the Ohio RSA No.
1 market. In addition, on February 29, 1996, the Company purchased a 50%
interest in South Carolina RSA No. 4 Cellular General Partnership, a 50%
interest in South Carolina RSA No. 5 Cellular General Partnership and a 50%
interest in South Carolina RSA No. 6 Cellular General Partnership. These
acquisitions were accounted for as purchases, and the aggregate purchase price
was approximately $110 million. The effects of these acquisitions on the
operating results of the Company were not significant.
On November 1, 1996, the Company completed its acquisition of Independent
Cellular Network, Inc. and affiliated companies (the "ICN Acquisition") which
own and operate cellular licenses and related systems and assets in Kentucky,
Ohio, Pennsylvania and West Virginia, providing cellular service to
approximately 140,000 customers in 20 markets, representing an estimated 3.3
million potential customers. The Company acquired the licenses from Independent
Cellular Network Partners and certain of its affiliates for approximately $519
million, comprising 6,500,000 shares of the Company's common stock, $122 million
in aggregate principal amount of the Company's subordinated promissory notes and
the Company's assumption of $240 million of Independent Cellular Network
Partners' senior debt, which was immediately refinanced with borrowings under
the Credit Facility. The remaining portion of the purchase price was paid in
cash. The ICN Acquisition was accounted for as a purchase and its results of
operations are included in the consolidated financial statements from the date
of acquisition. Assets and liabilities have been recorded at estimated fair
value based on an allocation of the purchase price.
On December 17, 1997, the Company signed a definitive agreement to divest
its 27.9% interest in the Omaha, Nebraska, cellular market through the sale of
its interest in the Omaha Cellular General Partnership. The proposed transaction
is subject to the receipt of all necessary consents and government approvals.
The Company expects to complete this transaction in the first quarter of 1998.
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
Depreciable
lives December 31,
------------- --------------------------
1997 1996
------------ ------------
Switching, base site controller and
radio frequency equipment 8-10 years $ 964,389 $ 847,214
Cell site towers and shelters 5-20 years 456,464 404,094
Office furniture and other equipment 2-5 years 189,872 162,255
------------ ------------
Plant in service 1,610,725 1,413,563
Construction work in progress 139,372 85,844
------------ ------------
1,750,097 1,499,407
Less: accumulated depreciation 561,140 415,981
$1,188,957 $1,083,426
============ ============
Depreciation expense charged to operations for the years ended December 31,
1997, 1996 and 1995 was $155,126,000, $124,024,000 and $95,540,000,
respectively.
48
<PAGE>
5. Investments in Unconsolidated Entities
Interests Owned
Interests owned in cellular systems of unconsolidated entities were as
follows:
December 31,
--------------------
1997 1996
------- -------
Florida 9 RSA Limited Partnership 49.00% 49.00%
Illinois Valley Cellular RSA 2-II Partnership 40.00% 40.00%
Pennsylvania RSA No. 5 General Partnership 40.00% 40.00%
Virginia 10 RSA Limited Partnership 33.00% 33.00%
Texas RSA No. 11B Limited Partnership 28.00% 28.00%
Omaha MSA Limited Partnership 27.90% 27.59%
GTE Mobilnet of Fort Wayne Limited Partnership 25.00% 25.00%
Texas RSA 7B1 Limited Partnership 25.00% 25.00%
Orlando SMSA Limited Partnership 24.59% 15.00%
RCTC Wholesale Company (Richmond) 24.59% 27.27%
Allentown SMSA Limited Partnership 20.77% 20.77%
GTE Mobilnet of Indiana RSA #3 Limited Partnership 20.00% 20.00%
St. Joseph SMSA Limited Partnership 20.00% 20.00%
Missouri RSA 9B1 Limited Partnership 19.60% 19.60%
Kansas City SMSA Limited Partnership 19.00% 19.00%
Illinois Independent RSA No. 3 General Partnership 18.13% 18.13%
Reading SMSA Limited Partnership 15.85% 15.85%
Missouri 1--Atchison RSA Limited Partnership 14.28% 14.28%
Missouri RSA 4 Partnership 12.50% 12.50%
New York SMSA Limited Partnership 10.00% 10.00%
GTE Mobilnet of South Texas Limited Partnership 8.77% 8.77%
Iowa 16--Lyon Limited Partnership 8.33% 8.33%
Iowa RSA 5 Limited Partnership 7.14% 7.14%
Iowa 15--Dickinson Limited Partnership 6.67% 6.67%
Iowa RSA No. 14 Limited Partnership 5.56% 5.56%
Chicago SMSA Limited Partnership 5.00% 5.00%
RSA 1 Limited Partnership (IA) 3.90% 3.90%
GTE Mobilnet of Ohio Limited Partnership 3.50% 3.50%
Iowa 8--Monona Limited Partnership 2.30% 2.30%
Cincinnati SMSA Limited Partnership 1.20% 1.20%
GTE Mobilnet of Austin Limited Partnership .82% .82%
Georgia RSA No. 1 Limited Partnership -- 20.00%
Iowa RSA No. 13 Limited Partnership -- 30.00%
Pennsylvania 3 Wireline Settlement Limited Partnership -- 44.44%
Pennsylvania 4 Wireline Settlement Limited Partnership -- 33.33%
RSA 11 Limited Partnership (IA) -- 14.14%
49
<PAGE>
5. Investments in Unconsolidated Entities (continued)
Financial Information
Condensed combined financial information, a portion of which is unaudited,
for investments in entities accounted for under the equity method (in
thousands):
For the Year Ended December 31,
-----------------------------------
1997 1996 1995
----------- ----------- -----------
Results of Operations
Cellular service revenues $2,207,922 $2,187,202 $1,796,895
Equipment sales 111,358 109,314 97,727
Total operating revenues 2,319,280 2,296,516 1,894,622
Cost of equipment sales 185,239 209,895 151,334
Operating, selling, general,
administrative and other expenses 1,304,689 1,266,353 1,049,117
Depreciation and amortization 230,224 227,480 201,459
Total operating expenses 1,720,152 1,703,728 1,401,910
Operating income 599,128 592,788 492,712
Non-operating income (expenses) 8,230 (642) (12,903)
Minority interests in net income
of consolidated entities -- -- (1,513)
Income before cumulative effects of
changes in accounting principles 607,358 592,146 478,296
Cumulative effects of changes in
accounting principles, net (6,523) -- --
---------- ---------- ----------
Net income $ 600,835 $ 592,146 $ 478,296
========== ========== ==========
December 31,
------------------------------
1997 1996
-------------- --------------
Assets
Current assets $ 473,253 $ 514,788
Noncurrent assets 1,786,617 1,702,668
------------- -------------
$ 2,259,870 $ 2,217,456
============= =============
Liabilities and equity
Current liabilities $ 188,656 $ 337,465
Long-term liabilities 12,634 8,911
Minority interests -- 3,384
Equity 2,058,580 1,867,696
------------- -------------
$ 2,259,870 $ 2,217,456
============= =============
Additional Disclosures
Accumulated deficit at December 31, 1997, included $178,765,000 related to
undistributed earnings of unconsolidated entities.
The Company has guaranteed 50% of a discounted note held by an
unconsolidated entity with a carrying value of $47,728,000 and $42,502,000 at
December 31, 1997 and 1996, respectively.
50
<PAGE>
6. Borrowings
Long-Term Debt
Long-term debt consisted of the following (in thousands):
December 31,
------------------------
1997 1996
---------- ----------
Credit facility borrowings, due 2002 $ 600,000 $ 680,000
Senior notes
due 2003, 7.125%, net of unamortized discount of
$1,077 in 1997 and $1,242 in 1996 (7.2%)(1) 448,923 448,758
due 2006, 7.5%, net of unamortized discount of
$903 in 1997 and $980 in 1996 (7.5%)(1) 449,097 449,020
due 2009, 7.6%, net of unamortized discount
of $311 in 1997 (7.4%)(2) 199,689 --
Subordinated promissory notes, due 2006, 9% 127,638 122,000
---------- ----------
Total long-term debt(3) $1,825,347 $1,699,778
========== ==========
- --------------------
(1) Weighted average annual effective interest rate at December 31, 1997 and
1996.
(2) Weighted average annual effective interest rate at December 31, 1997.
(3) Estimated fair value of $1,873,075 and $1,690,677 at December 31, 1997 and
1996, respectively, based on public quotations and
discounted cash flow analyses.
The Company has a revolving credit facility with a number of banks and
institutional lenders, with interest rates currently based on the London
Interbank Offered Rate plus 50 basis points. On October 31, 1996, the Credit
Facility was amended and restated to permit, among other things, the ICN
Acquisition and to increase the Company's borrowing capacity thereunder from
$800 million to $1 billion. A commitment fee of .15% per annum is charged on the
unused portion of the Credit Facility. Commitment fees totaled $562,000 and
$390,000 in 1997 and 1996, respectively. Such fees may range from .15% to .5%
depending on the Company's public debt rating. At December 31, 1997, the Company
had additional borrowing capacity under the Credit Facility of $308 million.
As part of its interest rate risk management program, the Company utilizes
interest rate swap agreements to hedge variable interest rate risk under the
Credit Facility to a fixed rate. Interest rate swap agreements are designated
with all or a portion of the principal balances and terms of specific debt
obligations. The related amount payable to or receivable from counterparties is
included in other current liabilities or assets. Net interest paid or received
related to such agreements is recorded using the accrual method and as an
adjustment to interest expense. At December 31, 1997 and 1996, the Company had
interest rate swap agreements with an aggregate notional amount of $200 million
and $100 million outstanding, respectively. The Company has not incurred any
gains or losses on terminations of interest rate swap agreements.
The Credit Facility has general and financial covenants that place certain
restrictions on the Company. On December 5, 1997, the Company entered into a
second amended and restated Credit Facility which relaxed the restrictions on
certain covenants, while extending the term of the Credit Facility to December
5, 2002. The Company is limited with respect to: the making of payments
(dividends and distributions); the incurrence of certain liens; the sale of
assets under certain circumstances; entering into or otherwise permitting any
subsidiary distribution restrictions; certain transactions with affiliates;
certain consolidations, mergers and transfers; and the use of loan proceeds.
51
<PAGE>
6. Borrowings (continued)
The senior notes have general and financial covenants similar to the Credit
Facility. However, these covenants, except for the limitation on liens, have
been suspended while the Company's public debt is rated investment grade (BBB-)
by Standard & Poor's and Duff & Phelps.
In conjunction with the ICN Acquisition, the Company issued subordinated
promissory notes with an annual interest rate of 9.5%, which was reduced to 9.0%
on February 10, 1997. Fifty percent of the interest due and owing is paid on
each interest payment date and the remaining 50% is capitalized and becomes part
of the principal amount owed thereunder. The subordinated promissory notes have
general and financial covenants that are suspended while the Company's public
debt is rated investment grade (BBB-) by Standard & Poor's and Duff & Phelps.
On February 13, 1997, a shelf registration filed with the Securities and
Exchange Commission became effective, providing for the issuance, from time to
time, of up to $500 million in aggregate initial offering price of unsecured
debt securities and/or warrants to purchase debt securities ("Debt Securities").
The net proceeds to be received by the Company will be available for general
corporate purposes and may be used for the repayment of short-term debt and
borrowings under the Credit Facility and for the funding of future acquisitions,
capital expenditures and working capital requirements.
On March 17, 1997, the Company issued $200 million in aggregate principal
amount of its 7.6% senior notes due 2009. The net proceeds from the sale of
these Debt Securities were used to repay a portion of the Company's long-term
indebtedness outstanding under the Credit Facility.
Short-Term Debt
As part of its cash management program, the Company incurs short-term
borrowings based on market interest rates to support its daily cash
requirements. At December 31, 1997 and 1996, the Company had short-term
borrowings of $18,150,000 and $43,750,000, respectively. The weighted average
interest rates on these borrowings was 5.77% and 5.62% for the years ended
December 31, 1997 and 1996, respectively.
7. Employee Benefit Plans
Defined Contribution Plans
Substantially all employees of the Company are covered by defined
contribution employee savings plans. Participants may contribute portions of
their compensation to the plans and the Company makes matching contributions up
to specified levels. The Company's matching contributions aggregated $5,287,000,
$5,283,000 and $2,030,000 in 1997, 1996 and 1995, respectively.
Effective with the spinoff, the Company discontinued its participation in
Sprint's defined contribution employee savings plans. The Company established
its own defined contribution plan, the terms and conditions of which have been
revised to reflect increased matching contribution levels. Balances held by
Sprint's defined contribution 401(k) plan on the behalf of the Company's
employees have been transferred to the Company's new defined contribution 401(k)
plan.
Postretirement Benefits
Effective with the spinoff, the Company discontinued its participation in
Sprint's postretirement benefits arrangements and established its own
arrangements. Terms and conditions of the Company's arrangements and related
cost levels do not differ significantly from those under Sprint's arrangements.
52
<PAGE>
7. Employee Benefit Plans (continued)
The Company sponsors postretirement benefits arrangements (principally
providing health care benefits) covering substantially all employees. Employees
who retired before specified dates are eligible for these benefits at no cost.
Employees retiring after specified dates are eligible for these benefits on a
shared cost basis. The Company funds the accrued costs as benefits are paid. The
net postretirement benefits costs for 1997, 1996 and 1995 were $495,000,
$474,000 and $176,000, respectively.
The Company's accrued postretirement benefits costs were $4,544,000 and
$4,049,000 as of December 31, 1997 and 1996, respectively.
Postemployment Benefits
Postemployment benefits offered by the Company include severance,
disability and workers compensation, including the continuation of other
benefits such as health care and life insurance coverage. Effective with the
spinoff, the Company discontinued its participation in Sprint's postemployment
benefits arrangements. Terms and conditions of the Company's arrangements and
related cost levels do not differ significantly from those under Sprint's
arrangements.
8. Stock-Based Compensation
Under various stock option plans, shares of common stock are reserved for
issuance to officers, outside directors and certain employees. Generally,
options are granted at 100% of the market price at the date of grant. Options
under these plans vest over one, three or four years. All options expire 10
years from the date of grant. Approximately 1.0% of these options outstanding
provide for the granting of stock appreciation rights as an alternative method
of settlement upon exercise. Shares authorized for grants of stock options
totaled 4,801,000 at December 31, 1997. Under the Company's various stock option
plans, 2,665,000 shares were available for the granting of options at December
31, 1997. In addition, non-vested stock is issued to certain officers and
outside directors and vests from one to five years after the date of grant. The
cost of shares of non-vested stock are amortized over their vesting period.
Stock option activity for the years 1997, 1996 and 1995 was as follows:
1997 1996 1995
--------------------- --------- ---------
Weighted
average
exercise
Shares price Shares Shares
--------- ---------- --------- ---------
Options outstanding,
beginning of year 1,365,397 $20.16 611,680 454,976
Options granted 709,050 $19.88 816,505 162,659
Options exercised 4,948 $15.44 22,783 5,955
Options canceled 78,267 $22.03 40,005 --
--------- --------- ---------
Options outstanding,
end of year 1,991,232 $20.01 1,365,397 611,680
========= ========= =========
Exercisable, end of year 733,592 $18.15
Weighted average fair value
of options granted during 1997 $7.55
53
<PAGE>
8. Stock-Based Compensation (continued)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------------
Weighted Weighted
Number remaining average Number average
Range of outstanding contractual exercise exercisable exercise
exercise prices at 12/31/97 life price at 12/31/97 price
---------------- ------------ ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 7.56 - $12.57 167,859 2.9 $10.00 167,859 $10.00
$ 14.91 - $19.94 1,083,164 8.1 $18.86 246,935 $16.83
$ 22.63 - $26.00 692,209 8.2 $23.39 318,798 $23.46
$ 29.00 - $32.00 32,000 8.3 $30.50 - -
$ 35.00 - $35.00 16,000 8.3 $35.00 - -
------------ ------------
$ 7.56 - $35.00 1,991,232 7.7 $20.01 733,592 $18.15
============ ============
</TABLE>
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for awards in 1997, 1996 and 1995,
consistent with the provisions of SFAS No. 123, the Company's net income and per
share amount would have been decreased by approximately $3,027,000 or $.03 per
share in 1997 and by $3,546,000 or $.03 per share in 1996. The Company's net
loss would have been increased by $576,000 or $.01 per share in 1995. The fair
value of options at date of grant was estimated using the Black-Scholes
valuation model with the following weighted average assumptions:
1997 1996 1995
-------------- -------------- ---------------
Expected life (years) 4.8 6.0 5.9
Expected volatility 31.6% 29.8% 29.8%
Dividend yield -- -- --
Interest rate 6.19% 7.15% 7.08%
The pro forma effect on net income for 1997, 1996 and 1995 is not
representative of the pro forma effect on net income for future years because it
does not take into account pro forma compensation expense related to grants made
prior to 1995 or the potential for issuance of additional stock options in
future years.
Employees Stock Purchase Plan
Under the 1994 offering of the Sprint Employees Stock Purchase Plan,
Company employees held elections to purchase shares of Sprint's common stock as
of December 31, 1995. In connection with the spinoff, elections made by
employees of the Company to purchase shares of Sprint common stock were replaced
by elections to purchase 99,000 shares of the Company's common stock. The
purchase price under the offering could not exceed $16.90 per share or fall
below $6.27 per share. Aggregate fair market value of stock underlying the
elections was maintained by adjusting the per share purchase price of elections
as well as the number of shares under election. The 1994 offering terminated on
June 30, 1996.
In March 1997, the Company began offering a new Employee Stock Purchase
Plan ("ESPP"). The Company reserved 500,000 common shares for issuance under the
ESPP. The ESPP permits eligible employees to purchase shares of common stock,
not to exceed 1,000 shares in a 12-month period, through payroll deductions. The
purchase price of the offering is the lower of 85% of the fair market value of
the Company's common stock on the first or last day of the defined period. As of
December 31, 1997, the Company had issued approximately 69,000 common shares
under the ESPP.
54
<PAGE>
8. Stock-Based Compensation (continued)
Had compensation cost for the Company's ESPP been determined based on the
fair value of the employees' rights to purchase common stock, consistent with
the provisions of SFAS No. 123, the Company's net income would have decreased by
approximately $326,000 and would have no effect on the Company's earnings per
share in 1997. The fair value of the employees' rights to purchase common stock
was estimated using the Black-Scholes valuation model assuming a weighted
average expected life of .496 years and an interest rate of 5.47%. The weighted
average fair value of the Company's ESPP was $4.12 for the 1997 plan year.
9. Income Taxes
The components of the income tax expense were as follows (in thousands):
For the Year Ended December 31,
-----------------------------------------
1997 1996 1995
------------ ----------- -------------
Current income tax expense (benefit)
Federal $ 28,606 $ 17,054 $ (14,485)
State 4,313 4,545 3,623
Deferred income tax expense
Federal 38,684 22,872 27,158
State 2,226 13,358 9,109
------------ ----------- -------------
Total income tax expense $ 73,829 $ 57,829 $ 25,405
============ =========== =============
A reconciliation from the statutory income tax rate (35%) to the effective
income tax rate (income tax expense divided by income (loss) before income
taxes) follows (in thousands):
For The Year Ended December 31,
---------------------------------
1997 1996 1995
----------- ----------- ---------
Income tax expense at the statutory rate $ 54,363 $ 41,072 $ 8,299
Effect of
State income tax expense, net of federal
income tax effect 4,250 11,637 8,276
Amortization of intangibles 10,344 7,556 8,736
Amounts relating to prior year's taxes 5,028 (2,753) --
Other, net (156) 317 94
----------- ----------- ---------
Income tax expense $ 73,829 $ 57,829 $ 25,405
=========== =========== =========
Effective income tax rate 47.5% 49.3% 107.1%
=========== =========== =========
55
<PAGE>
9. Income Taxes (continued)
The sources of the differences that gave rise to the deferred income tax
assets and liabilities as of December 31, 1997 and 1996, along with the income
tax effect of each, were as follows (in thousands):
<TABLE>
<CAPTION>
1997 Deferred 1996 Deferred
Income Taxes Income Taxes
------------------------------- -----------------------------
Current Noncurrent Current Noncurrent
assets assets (liabilities) assets assets (liabilities)
------- -------------------- ------ --------------------
<S> <C> <C> <C> <C>
Property, plant and equipment $ -- $ (113,152) $ -- $ (108,832)
Postretirement and other benefits -- 1,396 -- 1,341
Accrued liabilities 9,570 -- 9,384 --
Intangibles -- 27,155 -- (40,467)
Alternative minimum tax credit
carry forwards -- 9,716 -- --
Operating loss carryforwards 8,634 30,566 2,951 40,758
Other, net -- 427 -- 471
Less: valuation allowance (2,984) (16,578) (3,873) (6,276)
------ ------------- ------ -------------
Total $15,220 $ (60,470) $8,462 $ (113,005)
======= ============= ====== =============
</TABLE>
During 1997, the valuation allowance related to deferred income tax assets
increased by $9,413,000. The increase was attributable to purchase accounting
for the ICN Acquisition. Federal operating loss carryforwards remaining from the
ICN Acquisition totaled $24,705,000 with expiration dates from 2004 through
2011.
As of December 31, 1997, the Company had available tax benefits associated
with federal and state operating loss carryforwards of $24,705,000 and
$14,495,000, respectively, which expire in varying amounts annually from 1998
through 2012.
10. Commitments and Contingencies
Litigation, Claims and Assessments
On or about March 29, 1996, a lawsuit was brought in the Chancery Court of
Washington County, Jonesborough, Tennessee (the "Tennessee Action"), on behalf
of all customers in the Company's Tennessee markets regarding customer
notification of the Company's practice with respect to billing for fractional
minutes of service. In April 1996, the original complaint was amended to enlarge
the class of plaintiffs to include all customers in all of the Company's service
areas. In late April 1996, the Tennessee Action was removed to the United States
District Court for the Eastern District of Tennessee, Northern Division. The
Company moved to dismiss the action and the plaintiff filed a motion to remand.
On July 16, 1996, the Tennessee District Court granted the plaintiff's motion to
remand and returned the case to the Chancery Court of Washington County. The
Company's Motion to Dismiss is currently pending before the Chancery Court.
On or about May 28, 1996, a lawsuit was brought in the Common Pleas Court
of Erie County, Ohio (the "Ohio Action"), on behalf of all customers in all of
the Company's service areas regarding notification of the Company's practice
with respect to billing for fractional minutes of service. On June 25, 1996, the
Ohio Action was removed to the United States District Court for the Northern
District of Ohio, Western Division. Thereafter, the Company filed a Motion to
Dismiss Or In The Alternative, Stay pending resolution of the Tennessee Action
and the plaintiff filed a Motion to Remand. By Order dated December 17, 1996,
the Ohio District Court granted plaintiff's motion to remand and the Ohio Action
was returned to the Common Pleas Court. Plaintiff has recently commenced
discovery by serving a document request and interrogatories. On January 17,
1997, the Company filed a Motion to Stay This Action And For A Protective Order
seeking to stay the Ohio Action, including all discovery, pending resolution of
the Tennessee Action. The basis for the Motion to Stay, which is currently
pending before the Common Pleas Court, is the duplicity of the Ohio Action and
the Tennessee Action.
56
<PAGE>
10. Commitments and Contingencies (continued)
The Company believes that both lawsuits are without merit; however, the
ultimate outcome of these matters and the potential effect on the financial
condition and results of operations of the Company cannot be determined at this
time.
In August 1995, four independent dealers filed a lawsuit in the Court of
Common Pleas of Greenville County, South Carolina, alleging that the Company
breached its dealer agreements with the plaintiffs and engaged in unfair trade
practices. In particular, the plaintiffs alleged that the Company discontinued
the practice of allowing the plaintiffs to sell cellular telephones out of the
Company's inventory, and instead required the plaintiffs to maintain their own
inventories and sold cellular telephones to the public at prices lower than the
prices that the Company charged to the plaintiffs. On November 21, 1997, a jury
awarded the plaintiffs $1.9 million in compensatory damages and $10 million in
punitive damages. The Company has filed an appeal with the South Carolina
Supreme Court seeking to reverse the decision. The Company believes that it
acted in accordance with the dealer agreements and that the decision is wholly
unwarranted by the facts.
The Company is party to various other legal proceedings in the ordinary
course of business. Although the ultimate resolution of these various
proceedings cannot be ascertained, management of the Company does not believe
that such proceedings, individually or in the aggregate, will have a material
adverse effect on the results of operations or financial position of the
Company.
In addition, various lawsuits arising in the normal course of business are
pending against the cellular system entities in which the Company does not have
a controlling interest. Because the outcomes of such legal proceedings have not
been determined, no provision for any liability that may result upon
adjudication of such litigation has been made in the consolidated financial
statements of the cellular system entity or the Company. In view of the
uncertainty regarding such litigation, there can be no assurance that the
outcome of these lawsuits will not have a material adverse effect on the
Company's investment in these entities or in its equity in the net income of
each entity.
Operating Leases
Minimum rental commitments as of December 31, 1997, for all non-cancelable
operating leases, consisting principally of leases for office space, real estate
and tower space, were as follows (in thousands):
1998 $ 27,693
1999 23,626
2000 21,222
2001 19,467
2002 17,529
Thereafter 94,771
--------
Total $204,308
========
Rental expense aggregated $28,356,000, $20,259,000 and $17,605,000 in 1997,
1996 and 1995, respectively. The amount of rental commitments applicable to
subleases, contingent rentals and executory costs is not significant.
11. Related Party Transactions
Management believes that the pre-spinoff consolidated financial statements
of the Company, presented herein, reasonably reflect the historical
relationships with Sprint and its affiliates and reflect all of the Company's
costs of doing business. Management believes that there would not have been any
material difference from the amounts presented in the historical financial
statements had the Company operated on a stand-alone basis.
57
<PAGE>
11. Related Party Transactions (continued)
Prior to the spinoff, the Company reimbursed Sprint for certain data
processing services, other data-related costs and certain management and
administrative support services that were incurred for the Company's benefit.
Total charges for such services aggregated $22,754,000 in 1995. The terms of the
arrangements determining such charges by Sprint were reasonable, although there
was no assurance that these terms were comparable to those that would have been
obtained from unaffiliated third parties or on a stand-alone basis. Subsequent
to the spinoff, Sprint continued to provide certain administrative support
services to assure an orderly transition. Total charges reimbursed to Sprint
aggregated $15,820,000 in 1996.
Charges for long distance telecommunications and operator services provided
by interexchange carriers to cellular customers are based on terms and
conditions of contracts governing such charges. In March 1996 and May 1997, the
Company renegotiated agreements entered into between the Company and Sprint for
long distance service on an exclusive basis (provided that Sprint is able to
provide such services at competitive terms and conditions) which replaced the
existing long distance service agreement on terms that are believed to be
comparable to those that could be obtained from unaffiliated third parties.
The Company received local telephone, interconnection and toll services
from subsidiaries of Sprint pursuant to agreements between the subsidiaries and
the Company. Prior to the spinoff, related payments amounted to $43,601,000 in
1995.
As discussed in Note 2, in conjunction with the spinoff, the Company repaid
$1.4 billion of intercompany debt with proceeds from the issuance of the senior
notes and borrowings under the Credit Facility, with the remaining intercompany
debt contributed to the Company by Sprint as additional paid-in capital. Prior
to the spinoff, the Company borrowed from Sprint to the extent cash requirements
were not met through cash flows from operations and capital contributions from
minority partners. The Company entered into cash advance and borrowing
transactions with Sprint and certain affiliates. Interest expense on
intercompany debt was $23,463,000 and $127,240,000 in 1996 and 1995,
respectively.
The Company advances funds to unconsolidated entities to which it provides
management services for use in these entities' current operations and
construction activity. In turn, these entities advance excess cash to the
Company for cash management and investment. Minority investments receivable
totaled $82,000 and $733,000 at December 31, 1997 and 1996, respectively, and
are included in prepaid expenses and other on the Consolidated Balance Sheets.
Minority investments payable totaled $20,267,000 and $1,068,000 at December 31,
1997 and 1996, respectively, and are included in other current liabilities on
the Consolidated Balance Sheets.
Tax Sharing Agreement
In connection with the spinoff, Sprint and the Company entered into a Tax
Sharing and Indemnification Agreement (the "Tax Sharing Agreement") that
allocated the responsibility for taxes between Sprint and the Company. The Tax
Sharing Agreement is only applicable to taxes for 1996 and earlier years.
Tax Assurance Agreement
In connection with the spinoff, Sprint and the Company entered into an
agreement (the "Tax Assurance Agreement") pursuant to which certain limitations
designed to preserve the tax-free status of the spinoff were imposed on the
Company for a period of two years after the completion of the spinoff. The Tax
Assurance Agreement expires on March 7, 1998.
12. Subsequent Event
On January 13, 1998, the Company issued $100 million in aggregate principal
amount of its 6.65% senior notes due 2008. The net proceeds from the sale of
these Debt Securities were used to repay a portion of the Company's long-term
indebtedness outstanding under the Credit Facility.
58
<PAGE>
<TABLE>
Quarterly Financial Data
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
1997 1996 1997 1996 1997 1996 1997 1996
---------- --------- --------- ---------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues
Service revenues $293,970 $230,754 $328,834 $263,560 $335,245 $271,819 $338,620 $286,593
Equipment sales 12,876 8,941 11,428 10,613 12,264 9,857 13,935 13,735
---------- --------- --------- ---------- --------- --------- --------- ----------
Total operating revenues $306,846 $239,695 $340,262 $274,173 $347,509 $281,676 $352,555 $300,328
========== ========= ========= ========== ========= ========= ========= ==========
Operating Expenses
Cost of service $ 41,489 $ 22,139 $ 40,283 $ 22,205 $ 37,127 $ 24,148 $ 39,410 $ 31,253
Cost of equipment sales 28,449 20,609 24,394 25,355 28,486 25,046 35,127 33,317
Selling, general,
administrative
and other expenses 148,666 117,527 152,892 123,675 151,014 132,055 161,291 151,857
Depreciation and
amortization 45,529 32,997 46,833 35,157 45,376 36,833 46,964 41,854
---------- --------- --------- ---------- --------- --------- --------- ----------
Total operating
expenses $ 264,133 $ 193,272 $ 264,402 $ 206,392 $ 262,003 $218,082 $282,792 $258,281
========== ========= ========= ========== ========= ========= ========= ==========
Net Income $ 9,445 $ 6,980 $ 21,807 $ 24,284 $ 28,879 $ 22,887 $ 21,364 $ 5,369
========== ========= ========= ========== ========= ========= ========= ==========
Earnings Per Share $ 0.08 $ 0.06 $ 0.18 $ 0.21 $ 0.24 $ 0.20 $ 0.18 $ 0.04
=========== ========= ========= ========== ========== ========= ========== ==========
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
59
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information regarding directors of the Company is set forth under the
heading "Election of Directors" in the Company's definitive proxy statement for
the annual meeting of shareowners to be held on May 12, 1998 (the "Proxy
Statement"), which was filed with the Securities and Exchange Commission on
March 31, 1998, and is incorporated herein by reference. Information regarding
executive officers of the Company is included under Item 4a. of Part I hereof.
Item 11. Executive Compensation.
Information required by this Item is set forth under the heading "Executive
Compensation" in the Proxy Statement and, except for information under the
headings "Executive Compensation-Organization, Compensation and Nominating
Committee Report on Executive Compensation" and "Executive
Compensation-Performance Graph" contained therein, is incorporated by reference
herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by this Item is set forth under the heading "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement
and is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions.
Background of Spinoff and Relationship With Sprint
On June 23, 1995, Sprint Spectrum LP was awarded PCS licenses in 29 out of
51 MTAs auctioned by the FCC. Four additional MTAs are held by entities
affiliated with Sprint Spectrum LP or owned by affiliates of Sprint Spectrum LP.
FCC regulations prohibit a PCS licensee from also owning cellular licenses in
overlapping markets, effectively requiring Sprint to divest itself of the
cellular licenses in an MTA covering 10% or more of the population of such MTA.
As a result, the Sprint Board of Directors reviewed several alternatives to
eliminate conflicted cellular markets, including the sale of conflicting
holdings or the sale of more extensive holdings and a tax-free spinoff of the
Company to the holders of Sprint common stock. Because of concerns regarding tax
consequences of a sale of interests in individual markets and the effect that
such sales might have on the ability of the Company to market its services and
products, the Sprint Board of Directors approved the spinoff of the Company.
On March 7, 1996, the date of the spinoff, the Company paid $1.4 billion of
intercompany debt owed by the Company to Sprint and its subsidiaries and Sprint
and its subsidiaries contributed to the equity capital of the Company any debt
then owed to them by the Company in excess of the $1.4 billion of intercompany
debt that was repaid. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Spinoff." After the spinoff, the Company
began operating as an independent company. There is no agreement restricting
competition between the Company and Sprint and Sprint Spectrum LP and, in fact,
the Company and Sprint are currently competitors in wireless communications in
several markets.
Distribution Agreement
In connection with the spinoff, Sprint and the Company entered into an
agreement (the "Distribution Agreement") governing the terms and conditions of
the spinoff and certain aspects of the relationship between Sprint and the
Company after the spinoff. The following paragraphs describe the major
provisions of the Distribution Agreement and related agreements as well as
relationships between the two companies after the spinoff.
60
<PAGE>
Allocation of Pre-Spinoff Contingent Liabilities
The Company and Sprint agreed to mutual indemnification against liabilities
arising out of business activities of the other party prior to the spinoff. In
general, the Company will indemnify Sprint for any liabilities arising out of
cellular operations prior to the spinoff, and Sprint will indemnify the Company
for any liabilities arising from non- cellular operations prior to the spinoff.
Sprint and the Company agreed in the Distribution Agreement to equitably
allocate liabilities either jointly attributable to the business activities of
Sprint and the Company or not clearly attributable to either. The Distribution
Agreement provides more specific rules for allocating certain classes of
liabilities between Sprint and the Company. For instance, the Distribution
Agreement allocates employment-related claims to the Company or Sprint, based on
which party employed the claimant on the date the occurrence giving rise to the
claim arose. Also, the Distribution Agreement provides that (i) any claims based
on health effects of electro-magnetic radiation from the use of cellular
telephone service will be allocated entirely to the Company, and (ii) any claims
based on alleged misstatements or omissions in the disclosure documents relating
to the spinoff related public offering of the Company's senior notes will be
allocated to the Company, except with respect to those portions of the
disclosure documents for which Sprint provided information.
Release of Spinoff Related Liabilities
Both the Distribution Agreement and the Company's Amended and Restated
Certificate of Incorporation, as amended, provide that the Company may not bring
any claim against Sprint, its affiliates, or any officer, director, or other
affiliate of Sprint (including those who are officers or directors of the
Company), for breach of any duty that occurred prior to or in connection with
the spinoff, including but not limited to, the duty of loyalty or fair dealing,
on account of a diversion of a corporate business opportunity to Sprint or its
affiliates, including Sprint Spectrum LP.
Employee Benefits
The Distribution Agreement provided for the treatment of Sprint employee
benefits subsequent to the spinoff, as they related to employees who remained
employed by Sprint or its subsidiaries after the spinoff and employees who
remained employed by the Company after the spinoff. The Distribution Agreement
also provided for the adjustment of outstanding stock options. In the case of
grants made under Sprint's stock option plans and employee stock purchase plans
held by individuals who remained employed by Sprint, the number of shares
covered by a grant under such plans was increased, and the exercise or purchase
price per share was decreased, pursuant to a formula designed to cause the
economic value of the grants to remain the same after the spinoff, giving effect
to the diminution in value of Sprint common stock. Employees who remained
employed by the Company after the spinoff and who had grants under a Sprint
stock option plan or who elected to do so under Sprint's employee stock purchase
plan received replacement grants to purchase the Company's Common Stock and
their Sprint grants were canceled. In addition, the Distribution Agreement
provided that with respect to Sprint's retirement pension plan, all employees
who remained employed by the Company after the spinoff continued to earn service
credit under such plan, but only for purposes of vesting.
Intellectual Property
The Distribution Agreement provided for Sprint to license certain
intellectual property rights to the Company prior to the spinoff including
proprietary information and trademarks and trade names, as well as the use of
proprietary information by employees transferred to the Company in connection
with the spinoff. Under the Distribution Agreement, the Company was permitted to
use the Sprint brand name for a limited period, after which the Company was
prohibited from using the Sprint brand, including logos, marks, or other
insignia or words suggestive of affiliation with Sprint.
61
<PAGE>
Transitional Administrative Services
The Distribution Agreement provided for Sprint to continue to provide
certain administrative services to the Company for a period of up to two years
after the spinoff date. The Company agreed to the manner of compensating Sprint
for these services on a service-by-service basis, but in general the parties
attempted to make the amount of compensation approximate Sprint's variable cost.
Tax Sharing Agreement
In connection with the spinoff, Sprint and the Company entered into a Tax
Sharing Agreement (the "Tax Sharing Agreement") that allocated the
responsibility for taxes between Sprint and the Company. The Tax Sharing
Agreement is only applicable to taxes for 1996 and earlier years.
Tax Assurance Agreement
In connection with the spinoff, Sprint and the Company entered into an
agreement (the "Tax Assurance Agreement") pursuant to which certain limitations
designed to preserve the tax-free status of the spinoff were imposed on the
Company for a period of two years after the completion of the spinoff. The Tax
Assurance Agreement expired on March 7, 1998.
Operational Relationship
In March 1996 and May 1997, the Company renegotiated agreements entered
into between the Company and Sprint for long distance services on an exclusive
basis (provided that Sprint is able to provide such services at competitive
terms and conditions) which replaced the existing long distance service
agreement on terms that are believed to be comparable to those that could be
obtained from unaffiliated third parties. Sprint's Local Telecommunications
Division provides certain regulated long distance service to the Company in
areas served by Sprint's local telephone companies pursuant to an agreement
which was negotiated at arms-length prior to the acquisition of the Company by
Sprint. Sprint's Local Telecommunications Division provides these services at
rates tariffed for such services by state regulatory authorities.
Sprint also provides the Company with wide area frame relay network
monitoring and bill printing and mailing services under existing agreements.
These administrative services are in addition to the administrative services
described above (see "Transitional Administrative Services"), and the Company
expects to continue to obtain these services from Sprint for the indefinite
future. In addition, the Company leases from Sprint various equipment location
sites that the Company expects to keep in place.
The amounts paid pursuant to these and other operational agreements and
funding arrangements during each of the last three fiscal years are set forth in
Note 11 of Notes to Consolidated Financial Statements.
Certain Other Related Transactions
Information required by this Item relating to directors and executive
officers of the Company is set forth under the heading "Certain Transactions" in
the Proxy Statement and is incorporated by reference herein.
62
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a) Financial Exhibits, Financial Statement Schedule and Exhibits:
1. Financial Statements:
360 Communications Company and Subsidiaries
- Report of Independent Auditors
- Reports of Other Independent Accountants
- Consolidated Balance Sheets as of December 31, 1997 and
1996
- Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
- Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
- Consolidated Statements of Shareowners' Equity for the
years ended December 31, 1997, 1996 and 1995
- Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
The following schedule, for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission and is thereby required, is filed herewith:
Schedule II 360 Communications Company and Subsidiaries
- Consolidated Valuation and Qualifying Accounts for the
years ended December 31, 1997, 1996 and 1995
All other schedules are omitted because they are not
applicable, immaterial or the required information is included in
the consolidated financial statements or notes thereto.
(b) Reports on Form 8-K:
On Current Report on Form 8-K, dated October 15, 1997, under "Item 5.
Other Events," the Company filed a press release announcing its consolidated
operating results for the third quarter and first nine months of 1997.
63
<PAGE>
<TABLE>
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
SCHEDULE II-CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
(In thousands)
<CAPTION>
Additions
-------------------------------
Balance Charged to Balance
Beginning of Charged to Other Other End of
Year Income Accounts Deductions Year
--------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Allowance for uncollectibles $ 5,730 $ 32,020 $ (227) $ (30,921) (1) $ 6,602
Valuation allowance-
deferred income tax assets $ 10,149 $ (1,478) $ 10,891 $ - $ 19,562
1996
Allowance for uncollectibles $ 2,370 $ 23,952 $ 845 $ (21,437) (1) $ 5,730
Valuation allowance-
deferred income tax assets $ 5,305 $ (276) $ 5,120 $ - $ 10,149
1995
Allowance for uncollectibles $ 2,043 $ 16,475 $ 10 $ (16,158) (1) $ 2,370
Valuation allowance-
deferred income tax assets $ 2,850 $ 2,455 $ - $ - $ 5,305
- ------------
<FN>
(1) Accounts written off, net of recoveries.
</FN>
</TABLE>
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
360 COMMUNICATIONS COMPANY
By: /s/ Dennis E. Foster
Dennis E. Foster
President and Chief Executive Officer
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Dennis E. Foster President and Chief Executive March 31, 1998
- ------------------------------ Officer and Director
Dennis E. Foster (Principal Executive Officer)
/s/ Michael J. Small Executive Vice President and March 31, 1998
- ------------------------------ Chief Financial Officer
Michael J. Small (Principal Financial Officer)
/s/ Jeffery R. Gardner Senior Vice President - Finance March 31, 1998
- ------------------------------ (Principal Accounting Officer)
Jeffery R. Gardner
/s/ Frank E. Reed Chairman of the Board March 31, 1998
- ------------------------------ of Directors
Frank E. Reed
/s/ Lester Crown Director March 31, 1998
- ------------------------------
Lester Crown
/s/ Michael Hooker Director March 31, 1998
- ------------------------------
Michael Hooker
/s/ Robert E. R. Huntley Director March 31, 1998
- ------------------------------
Robert E. R. Huntley
/s/ Valerie B. Jarrett Director March 31, 1998
- ------------------------------
Valerie B. Jarrett
/s/ Alice M. Peterson Director March 31, 1998
- ------------------------------
Alice M. Peterson
/s/ Charles H. Price, II Director March 31, 1998
- ------------------------------
Charles H. Price, II
65
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
2.1 Distribution Agreement dated as of March 7, 1996, by and among
Sprint Corporation, 360 Communications Company (formerly
Sprint Cellular Company) and Centel Corporation. (Filed as
Exhibit 2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, File No. 1-14108, and
incorporated herein by reference.)
2.2 Exchange and Merger Agreement, dated as of May 31, 1996, by
and among Independent Cellular Network Partners, James A.
Dwyer, Jr., David Winstel, CC Industries, Inc., Ohio Cellular
RSA, L.P., Ohio RSA Corporation, Quality Cellular
Communications of Ohio, Inc., Cellular Plus, L.P., C-Plus,
Inc., Quality Cellular Plus Communications, Inc., Henry Crown
and Company (Not Incorporated) and 360 Communications Company.
(Filed as Exhibit 2.2 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1996, File
No. 1-14108, and incorporated herein by reference.)
2.3 First Amendment to Exchange and Merger Agreement, dated as of
November 1, 1996, by and among Independent Cellular Network
Partners, James A. Dwyer, Jr., David Winstel, CC Industries,
Inc., Ohio Cellular RSA, L.P., Ohio RSA Corporation, Quality
Cellular Communications of Ohio, Inc., Cellular Plus, L.P.,
C-Plus, Inc., Quality Cellular Plus Communications, Inc.,
Henry Crown and Company (Not Incorporated) and 360
Communications Company. (Filed as Exhibit 2.3 to the Company's
Current Report on Form 8-K dated November 1, 1996, File No.
1-14108, and incorporated herein by reference.)
2.4 Agreement and Plan of Merger dated as of March 16, 1998 among
ALLTEL Corporation, Pinnacle Merger Sub, Inc. and 360
Communications Company (Filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K/A dated March 16, 1998, File No.
1-14108, and incorporated herein by reference.)
2.5 Stock Option Agreement dated as of March 16, 1998 between
ALLTEL Corporation and 360 Communications Company (Filed as
Exhibit 2.2 to the Company's Current Report on Form 8-K/A
dated March 16, 1998, File No. 1-14108, and incorporated
herein by reference.)
3.1 Amended and Restated Certificate of Incorporation of 360
Communications Company, as amended as of March 4, 1996. (Filed
as Exhibit 3.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, File No. 1-14108, and
incorporated herein by reference.)
3.2 Amended and Restated Bylaws of 360 Communications Company.
(Filed as Exhibit 3.2 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995, File No.
1-14108, and incorporated herein by reference.)
3.3 Certificate of Designation of First Series Junior
Participating Preferred Stock of 360 Communications Company.
(Filed as Exhibit 3.3 to Amendment No. 4 to Registration
Statement on Form S-1 (No. 33-99756), and incorporated herein
by reference.)
4.1 360 Communications Company's 7 1/8% Senior Note Due 2003 and 7
1/2% Senior Note Due 2006. (Filed as Exhibit 4.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, File No. 1-14108, and incorporated herein
by reference.)
66
<PAGE>
4.2 Indenture dated as of March 7, 1996 between 360 Communications
Company and Citibank, N.A., as 4.2 Trustee. (Filed as Exhibit
4.2 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995, File No. 1-14108, and
incorporated herein by reference.)
4.3 Form of 360 Communications Company Common Stock, $0.01 par
value, certificate. (Filed as Exhibit 4.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995, File No. 1- 14108, and incorporated herein by
reference.)
4.4 Rights Agreement dated as of March 5, 1996 between 360
Communications Company and Chemical Bank. (Filed as Exhibit
10.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, File No. 1-14108, and
incorporated herein by reference.)
4.5 Form of 360 Communications Company's Subordinated
Non-Negotiable Promissory Note (included in Exhibit 2.2 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1996, File No. 1-14108, and incorporated
herein by reference).
4.6 Indenture dated as of March 1, 1997 from 360 Communications
Company to Citibank, N.A., as Trustee. (Filed as Exhibit 4.6
to the Company's Current Report on Form 8-K dated March 17,
1997, File No. 1-14108, and incorporated herein by reference.)
4.7 360 Communications Company's 7.60% Senior Note Due 2009.
(Filed as Exhibit 4.7 to the Company's Current Report on Form
8-K dated March 17, 1997, File No. 1-14108, and incorporated
herein by reference.)
4.8 360 Communications Company's 6.65% Senior Note Due 2008.
(Filed as Exhibit 4.8 to the Company's Current Report on Form
8-K dated January 13, 1998, File No. 1-14108, and incorporated
herein by reference.)
4.9 First Amendment to Rights Agreement dated as of March 16, 1998
to Rights Agreement dated as of March 5, 1996 between 360
Communications Company and The Chase Manhattan Bank, as
successor in interest to Chemical Bank, as Rights Agent.
(Filed as Exhibit 4.9 to the Company's Current Report on Form
8-K/A dated March 16, 1998, File No. 1-14108, and incorporated
herein by reference.)
10.1 Tax Sharing Agreement dated as of March 7, 1996 among Sprint
Corporation and 360 Communications Company. (Filed as Exhibit
10.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, File No. 1-14108, and
incorporated herein by reference.)
10.2 Tax Assurance Agreement dated as of March 7, 1996, by and
between Sprint Corporation and 360 Communications Company.
(Filed as Exhibit 10.2 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995, File No.
1-14108, and incorporated herein by reference.)
10.3 Employment Agreement between 360 Communications Company and
Dennis E. Foster. (Filed as Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996, File No. 1-14108, and incorporated herein by
reference.)*
10.4 360 Communications Company Replacement Stock Option Plan.
(Filed as Exhibit 10.4 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995, File No.
1-14108, and incorporated herein by reference.)*
10.5 360 Communications Company 1996 Equity Incentive Plan. (Filed
as Exhibit 10.5 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, File No. 1-14108,
and incorporated herein by reference.)*
67
<PAGE>
10.6 360 Communications Company Amended and Restated Director
Equity and Deferred Compensation Plan.*
10.7 Form of Indemnification Agreement between 360 Communications
Company and its directors and officers. (Filed as Exhibit 10.7
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995, File No. 1-14108, and
incorporated herein by reference.)*
10.9 First Amendment to Employment Agreement between 360
Communications Company and Dennis E. Foster.*
10.10 Form of Amended and Restated Change-In-Control Agreement
between 360 Communications Company and each executive officer
other than Dennis E. Foster.*
10.11 Second Amended and Restated Credit Agreement dated as of
December 5, 1997 among 360 Communications Company, the initial
lenders named therein, Citibank, N.A., as Administrative
Agent, The Chase Manhattan Bank, as Syndication Agent, Toronto
Dominion (Texas), Inc., as Documentation Agent, and Bank of
America N.T & S.A., as Syndication Agent. (Filed as Exhibit
10.11 to the Company's Current Report on Form 8-K dated
January 13, 1998, File No. 1-14108, and incorporated herein by
reference.)
12 Statement regarding computation of Ratio of Earnings to Fixed
Charges.
21 Subsidiaries of 360 Communications Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen LLP, regarding GTE Mobilnet of
South Texas Limited Partnership.
23.3 Consent of Arthur Andersen LLP, regarding Chicago SMSA Limited
Partnership.
23.4 Consent of Coopers & Lybrand L.L.P., regarding New York SMSA
Limited Partnership.
23.5 Consent of Coopers & Lybrand L.L.P., regarding Orlando SMSA
Limited Partnership.
27 Financial Data Schedule.
- ---------------
* Indicates management contract or compensatory plan or arrangement.
68
360 COMMUNICATIONS COMPANY
AMENDED AND RESTATED
DIRECTOR EQUITY AND DEFERRED COMPENSATION PLAN
The 360 Communications Company Director Equity And Deferred
Compensation Plan, as established by 360 Communications Company, a Delaware
corporation (the "Company"), effective as of March 7, 1996, as amended and
restated effective as of January 1, 1997, is hereby further amended and restated
as set forth below.
1. PURPOSES
The purposes of the Plan (as defined below) are to enable the Company
to attract, retain and motivate the best-qualified directors, to enhance a
long-term mutuality of interest between the directors and shareowners of the
Company by providing them with ownership interest under the Plan and granting
them options to purchase the Company's Common Stock, and to provide directors an
opportunity to defer the receipt of certain director's fees.
2. DEFINITIONS
Unless the context requires otherwise, the following words as used in
the Plan shall have the meanings specified below:
(a) "Annual Meeting" shall an annual meeting of the shareowners of the
Company.
(b) "Award" means any Options or Restricted Stock Award.
(c) "Beneficiary" means the person or persons who under the Plan
becomes entitled to receive a Participant's interest in the event of the
Participant's death and who has been designated as such by a Participant in a
written notice received by the Vice President, Human Resources of the Company
before such Participant's death.
(d) "Board" means the Board of Directors of the Company.
(e) "Annual Retainer" means the aggregate amount of any annual retainer
fees that are payable from time to time by the Company to a Participant in cash
or as a Restricted Share Award (valued as provided in Section 6(a)) for any
services to be performed by the Participant as a member of the Board or any
committee thereof, but excludes any meeting fees for attending meetings of the
Board or a Board committee.
(f) "Chairman of the Board" means a Participant who serves as chairman
of the Board.
(g) "Chairman's Grant" -- see Section 6(b).
<PAGE>
(h) "Chairman's Retainer" means the aggregate amount of any retainer
fees that are payable from time to time by the Company to the Chairman of the
Board in cash or as a Restricted Share Award (valued as provided in Section
6(b)) for any services to be performed as the Chairman of the Board, but
excludes any meeting fees for attending meetings of the Board.
(i) "Change of Control" means any one or more of the following:
(i) the acquisition or holding by any person, entity or "group"
(within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other
than by the Company or any Subsidiary or any employee benefit plan of the
Company or a Subsidiary, of beneficial ownership (within the meaning of Rule
13d-3 under the Exchange Act) of 30% or more of the then-outstanding Common
Stock or 30% or more of the Voting Power of the Company; provided, however, that
no Change of Control shall occur solely by reason of any such acquisition by a
corporation with respect to which, after such acquisition, more than 60% of both
the then-outstanding common shares and the then-outstanding Voting Power of such
corporation are then-beneficially owned, directly or indirectly, by the persons
who were the beneficial owners of the Common Stock and Voting Power of the
Company immediately before such acquisition, in substantially the same
proportions as their respective ownership, immediately before such acquisition,
of the then-outstanding Common Stock and Voting Power of the Company; or
(ii) approval by the shareowners of the Company of (A) a merger,
reorganization or consolidation ("Extraordinary Transaction") with respect to
which persons who were the respective beneficial owners of the Common Stock and
the Voting Power of the Company immediately before such Extraordinary
Transaction would not, if such Extraordinary Transaction were to be consummated
immediately after such shareowner approval (but otherwise in accordance with the
terms presented in writing to the shareowners of the Company for their
approval), beneficially own, directly or indirectly, more than 60% of both the
then-outstanding common shares and the then-outstanding Voting Power of the
corporation resulting from such Extraordinary Transaction, in substantially the
same proportions as their respective ownership, immediately before such
shareowner approval, of the then-outstanding Common Stock and Voting Power of
the Company, (B) a liquidation or dissolution of the Company or (C) the sale or
other disposition of all or substantially all of the assets of the Company in
one transaction or a series of related transactions.
(j) "Code" means the Internal Revenue Code of 1986, as amended.
(k) "Common Stock" means the common stock of the Company, par value
$0.01.
(l) "Company" means 360 Communications Company, a Delaware corporation.
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(m) "Deferral Notice" -- see Section 7(a).
(n) "Deferred Compensation Account" means the account(s) maintained on
the books of the Company for each Participant.
(o) "Determination Date" means the date on which the amount of a
Participant's Deferred Compensation Account is determined as provided in Section
8 hereof. Each business day shall be a Determination Date.
(p) "Disability" means a mental or physical condition which, in the
judgment of the Board, renders a Participant unable to carry out his or her
responsibilities as a director of the Company, and which condition is expected
to be permanent or for an indefinite duration exceeding one year.
(q) "Effective Date" means March 7, 1996.
(r) "Employee Deferral Plan" means the 360Communications Company
Deferred Compensation Plan.
(s) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(t) "Fair Market Value" as of any date means the closing price of a
Share on such date (or, if no sale of Shares was reported for such date, on the
next preceding date on which a sale of Shares was reported) as reported in the
principal consolidated transaction reporting system for the New York Stock
Exchange (or, if the Common Stock is not listed on the New York Stock Exchange,
on such other national exchange or the over-the-counter market on which the
Common Stock is principally traded); provided that if such Fair Market Value as
of any date cannot be so determined, such Fair Market Value shall be determined
by the Board by whatever means or method as it, in the good faith exercise of
its discretion, shall at such time deem appropriate.
(u) "Immediate Family" -- see Section 8(a).
(v) "including" means including without limitation.
(w) "Initial Option" -- see Section 5(a).
(x) "Minimum Consideration" means $.01 per Share or such other amount
that is from time to time considered to be capital for purposes of Section 154
of the Delaware General Corporation Law.
(y) "Option" means the right to purchase one Share at a prescribed
purchase price on the terms specified in Section 5 of the Plan. An Option can be
either an Initial Option or a Subsequent Option. Options are nonstatutory stock
options not intended to qualify under Section 422 of the Code.
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(z) "Participant" means, as of any date, a person who, at the close of
business on such date, is director of the Company, but is not an employee of the
Company or any Subsidiary.
(aa) "Participant's Grant" -- see Section 6(a).
(bb) "Permissible Transferee" -- see Section 8(a).
(cc) "Plan" means the 360 Communications Company Amended and Restated
Director Equity and Deferred Compensation Plan, as set forth herein and as may
be amended from time to time.
(dd) "Restricted Stock Award" means a grant of Shares to a Participant
pursuant to Section 6(a) or 6(b) and subject to the restrictions specified in
Section 6.
(ee) "Securities Act" means the Securities Act of 1933, as amended.
(ff) "Share" means a share of Common Stock.
(gg) "Stock Units" -- see Section 7(c).
(hh) "Subsequent Option" -- see Section 5(b).
(ii) "Subsidiary" means a United States or foreign corporation with
respect to which the Company owns, directly or indirectly, 50% or more of the
then-outstanding common stock.
(jj) "Voting Power" means the combined voting power of the
then-outstanding securities of a corporation entitled to vote generally in the
election of directors
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3. ADMINISTRATION
(a) Rules; Interpretation; Determinations. Subject to the provisions of
the Plan, the Board has full authority to interpret and administer the Plan, to
establish, amend and rescind rules for carrying out the Plan, to construe option
agreements and to make all other determinations and to take all other actions
that it deems necessary or desirable for administering the Plan; provided,
however, that no such interpretation, rule or determination shall change
criteria for the determination of Participants in the Plan, the amount or
frequency of any Award that may be granted under the Plan (except for changes in
the amount of Restricted Stock Awards that result solely from changes in the
amount of the Annual Retainer or the Chairman's Retainer), or the terms upon
which, or the times at which, or the periods within which, Options may be
exercised or the restrictions applicable to a Restricted Stock Award may lapse.
Each determination, interpretation or other action made or taken by the Board
shall be final and binding for all purposes and upon all persons. The Board may
delegate any or all of its powers and functions under the Plan (other than the
power to amend the Plan pursuant to Section 9(b)) to a committee of the Board.
(b) Agents; Expenses. The Board may appoint agents (who may be
employees of the Company) to assist in the administration of the Plan, and may
authorize such persons to execute agreements or other documents on its behalf.
The Board may employ such legal counsel, consultants and agents as it may deem
desirable for the administration of the Plan, and may rely upon any opinion
received from any such counsel or consultant and any computation received from
any such consultant or agent. All expenses incurred in the administration of the
Plan, including for the engagement of any counsel, consultant or agent, shall be
paid by the Company.
(c) No Liability. No director or former director or any agent
designated pursuant to Section 3(b) shall be liable for any action or
determination made in good faith with respect to the Plan or any Award.
4. SHARES; ADJUSTMENT UPON CERTAIN EVENTS
(a) Shares. Shares to be issued or delivered under the Plan may
consist, in whole or in part, of treasury shares or authorized but unissued
Shares not reserved for any other purpose. The aggregate number of Shares that
may be issued under the Plan shall not exceed 400,000, except as provided in
this Section. If all or any portion of any Award is for any reason canceled or
forfeited or, in the case of Options, expires or terminates unexercised, the
Shares covered by the portion of such Award that is canceled or forfeited or
expires or terminates, as applicable, shall again be available for the grant of
additional Awards.
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(b) Certain Adjustments. In the event of any stock dividend or stock
split, recapitalization, merger, consolidation, combination, spin-off,
distribution of assets to shareowners (other than ordinary cash dividends),
exchange of shares, or other similar corporate change, the Board shall
appropriately adjust (i) the aggregate number of Shares available for Awards
under Section 4(a), (ii) the number of Shares to be subject to subsequent grants
of Initial Options and Subsequent Options, and (iii) to the extent necessary to
preserve the economic value of unexercised Options, the number of Shares subject
to outstanding Options and the respective exercise prices applicable to
outstanding Options. The Board's determination shall be conclusive.
5. TERMS OF OPTIONS
(a) Initial Grant. Each Participant shall automatically be granted an
initial Option (the "Initial Option") to purchase 9,000 Shares on the date such
Participant first becomes a Participant or, if later, the Effective Date.
(b) Subsequent Grants. Each Participant shall automatically be granted
an Option (a "Subsequent Option") to purchase 3,000 Shares as of the close of
business on the date of each Annual Meeting, commencing with the third Annual
Meeting held after such Participant first becomes a Participant.
(c) Option Agreement. Options shall be evidenced by a written option
agreement between the Company and the Participant embodying the following terms:
(i) Exercise Price. The purchase price per Share of an Option shall be
100% of the Fair Market Value of a Share on the date such Option is granted.
(ii) Exercisability. Each Initial Option shall become exercisable in
three installments of 33-1/3% each, with the first such installment becoming
exercisable on or after December 31 in the calendar year during which such
Initial Option is granted and another installment becoming exercisable on or
after each subsequent December 31. Each Subsequent Option shall become
exercisable in four annual installments of 25% each, with the first such
installment becoming exercisable on December 31 in the calendar year during
which such Subsequent Option is granted and an additional installment becoming
exercisable on December 31 of each of the three subsequent years.
Notwithstanding the foregoing, all Options shall immediately become fully
exercisable in the event of a Change of Control.
(iii) Expiration. Each Option shall expire upon the tenth (10th)
anniversary of the date of the grant thereof. Options may be exercised only
during the continuance of that Participant's service as a director of the
Company; provided that if a Participant shall cease to be a director on account
of Disability, death, resignation, failure to stand for reelection or failure to
be reelected, such Participant or, in the case of death, the Participant's
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estate or Beneficiary, may exercise an Option (to the extent such Option was
exercisable on the date the Participant ceased to be a director of the Company)
until the earlier of (A) one year from the date the Participant ceased to be a
director and (B) the tenth (10th) anniversary of the date the Option was
granted.
(d) Procedure for Exercise. A Participant electing to exercise one or
more Options shall give written notice to the Secretary of the Company (or his
or her designee) of such election and of the number of Shares he or she has
elected to purchase. Shares purchased pursuant to the exercise of Options shall
be paid for at the time of exercise in cash, by delivery to the Company of
unencumbered Shares owned by the Participant for at least six months (or such
longer period as is required by applicable accounting standards to avoid a
charge to the Company's earnings), or by a combination thereof. Upon receipt of
such payment, the Company shall deliver to the Participant as soon as
practicable a certificate or certificates for the Shares purchased in the name
of the Participant.
6. TERMS OF RESTRICTED STOCK
(a) Grants to All Participants. Each Participant, including the
Chairman of the Board, shall automatically be granted a Restricted Stock Award
(a "Participant's Grant") (i) on the date he or she first becomes a Participant
or, if later, the Effective Date, and (ii) as of the close of business on the
date of each Annual Meeting; provided, however, that no Participant shall
receive more than one Participant's Grant during any calendar year. The number
of Shares included in any Participant's Grant shall equal 50% of the Annual
Retainer in effect on the date of such Participant's Grant divided by the Fair
Market Value of a Share on such date.
(b) Additional Grants to the Chairman of the Board. In addition to
Participant's Grants pursuant to Section 6(a), the Chairman of the Board shall
automatically be granted a Restricted Stock Award (a "Chairman's Grant") (i) on
the date he or she first becomes Chairman of the Board or, if later, the
Effective Date, and (ii) as of the close of business on the date of each Annual
Meeting; provided, however, that no Chairman of the Board shall receive more
than one Chairman's Grant during any calendar year. The number of Shares
included in any Chairman's Grant shall equal 25% of the Chairman's Retainer in
effect on the date of such Chairman's Grant divided by the Fair Market Value of
a Share on such date.
(c) Payment of Minimum Consideration; No Fractional Shares. Except with
respect to a Restricted Stock Award granted in the form of treasury shares, for
which no payment is to be required, each Participant shall pay to the Company an
amount in cash equal to the Minimum Consideration for each Share underlying a
Restricted Stock Award. Such payment shall be made in full by the Participant
before the delivery of such Shares and in any event no later than 30 days after
the grant of such Restricted Stock Award. No fractional Shares shall be issued
in connection with any Restricted Stock Award. Whenever a fractional Share would
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otherwise be required to be issued, an amount in lieu thereof shall be paid in
cash based upon the Fair Market Value of such fractional Share.
(d) Restrictions. Except as otherwise provided in the Plan, Shares
received pursuant to a Restricted Stock Award may not be sold, assigned,
pledged, or otherwise transferred until the restrictions applicable to such
Stock have lapsed pursuant to Section 6(e).
(e) Lapse of Restrictions. All restrictions on a Restricted Stock Award
shall lapse immediately before the commencement of the first Annual Meeting
following the grant of the Restricted Stock Award or, if sooner, the earlier of
(i) a Change of Control or (ii) the effective date of any mandatory retirement
pursuant to a mandatory retirement policy applicable to all members of the
Board.
(f) Termination. If, for any reason other than the Participant's death
or Disability, a Participant's service as a director terminates at any time
before the restrictions applicable to a Restricted Stock Award have lapsed
pursuant to Section 6(e), then such Restricted Stock Award shall be forfeited in
its entirety. If a Participant's service as a director terminates by reason of
the death or Disability of such Participant, then all restrictions applicable to
any Restricted Stock Award held by such Director shall immediately lapse.
(g) Rights as a Shareowner. Subject to the provisions of the Plan, a
Restricted Stock Award shall entitle the grantee thereof to all of the voting,
dividend, liquidation and other rights of a holder of Common Stock with respect
to the Shares subject to such Restricted Stock Award.
(h) Stock Certificate Legend. The Company shall place a legend on the
certificates for the Shares issued pursuant to each Restricted Stock Award
referring to the restrictions imposed in the Plan.
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7. DEFERRED COMPENSATION PROGRAM
(a) Deferral Election. On or before December 31 of any calendar year
ending on or before December 31, 2005, a Participant may elect to defer receipt
of all or any specified portion, in multiples of 10%, of the cash portion of any
Annual Retainer or Chairman's Retainer, as applicable, payable in respect of the
calendar year following the year in which such election is made, and to have
such amounts credited to such Participant's Deferred Compensation Account. Any
person who shall become a Participant during any calendar year may elect, not
later than the 30th day after his or her term as a director begins, to defer
payment of all or any portion of his or her Annual Retainer payable for the
portion of such calendar year following such election. Any person who shall
become Chairman of the Board during any calendar year may elect, not later than
the 30th day after his or her term as Chairman of the Board begins, to defer
payment of all or any portion of his or her Chairman's Retainer payable for the
portion of such calendar year following such election.
(b) Form and Duration of Deferral Election. A deferral election shall
be made by written notice (a "Deferral Notice") filed with the Vice President,
Human Resources, of the Company. Such Deferral Notice shall continue in effect
(including with respect to the Annual Retainer and Chairman's Retainer, if any,
payable for subsequent calendar years) unless and until the Participant revokes
or modifies such election by filing a new Deferral Notice with the Vice
President, Human Resources of the Company. Any such revocation or modification
of a Deferral Notice shall become effective as of the end of the calendar year
in which such notice is given and only with respect to the Annual Retainer and
Chairman's Retainer, if any, payable for services rendered thereafter. Amounts
credited to the Participant's Deferred Compensation Account prior to the
effective date of any such revocation or modification of a Deferral Notice shall
not be affected by such revocation or modification and shall be distributed only
in accordance with the otherwise applicable terms of the Plan. A Participant who
has revoked an election to participate in the Plan may file a new election to
defer the Annual Retainer or Chairman's Retainer, if any, payable for services
to be rendered in the calendar year following the year in which such new
election is filed.
(c) Determination of Value of Account. The value of a Participant's
Deferred Compensation Account as of any date shall consist of the value of the
Participant's Deferred Compensation Account as of the immediately preceding
Determination Date, plus the Participant's deferrals pursuant to Section 7(a)
since the immediately preceding Determination Date, reduced by the amount of all
distributions, if any, made from such Deferred Compensation Account since the
preceding Determination Date, and adjusted for the appropriate investment
earnings and gains and/or losses and expenses pursuant to this Section 7(c)
since the preceding Determination Date. Adjustments for earnings and gains
and/or losses and expenses shall be made after the Deferred Compensation Account
has been adjusted for any additions or distributions to be credited or deducted
since the preceding Determination Date.
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(d) Deferred Compensation Account Investment Options. Deferred
Compensation Accounts may be deemed invested in one or more investment options
which may from time to time be available to participants in the Employee
Deferral Plan. A Participant (or Beneficiary of a deceased Participant) shall
allocate his or her Deferred Compensation Account among the deemed investment
options (in 5% increments, with a minimum of 10% in any investment option) by
filing with the Vice President, Human Resources, of the Company an investment
allocation election. As of January 1, 1997, the following phantom investment
options are available:
(i) Small Cap Equity Option.
(ii) Large Cap Equity Option.
(iii) Prime Interest Rate Option. The monthly interest rate established
for this fund shall be the quotient obtained by dividing (i) the
prime rate as in effect on the first business day of the relevant
calendar month as reported in The Wall Street Journal ("annual
rate") by (ii) 12. Interest under this option shall be credited
daily and compounded monthly as of the last business day of each
month.
(iv) International Equity Option.
(v) Intermediate Bond Option.
(vi) 360(0) Communications Common Stock Units Option. Amounts deemed
invested in the 360 Communications Common Stock Units Option
shall initially be deemed invested in a number of notional Shares
(the "Stock Units") equal to the quotient of (i) the amount
deemed invested divided by (ii) the Fair Market Value on the date
the amount is deemed so invested. Fractional Stock Units shall be
credited, but shall be rounded to the nearest one-hundredth, with
amounts equal to or greater than .005 rounded up and amounts less
than .005 rounded down. Whenever a dividend (other than a
dividend payable in the form of Shares) is declared with respect
to the outstanding Shares, the number of Stock Units credited to
the Participant shall be increased by the number of Stock Units
determined by dividing (i) the product of (A) the number of Stock
Units credited to the Participant under the Plan on the related
dividend record date and (B) the amount of any cash dividend
declared by the Company on a Share (or, in the case of any
dividend distributable in property other than Shares, the per
share value of such dividend, as determined by the Company for
purposes of income tax reporting) by (ii) the Fair Market Value
on the related dividend payment date. In the case of any dividend
declared on Shares which is payable in Shares, the amount
credited to a Participant's deemed investment in the
360Communications Common Stock Units Option shall be increased by
the number of Stock Units equal to the product of (i) the number
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of Stock Units credited to the Participant under the Plan on the
related dividend record date and (ii) the number of Shares
(including any fraction thereof) distributable as a dividend on a
Share. In the event of any change in the number or kind of
outstanding Shares by reason of any recapitalization,
reorganization, merger, consolidation, stock split or any similar
change affecting the Shares, other than a stock dividend as
provided above, the Company shall make an appropriate adjustment
in the number of Stock Units credited to the Participant.
Any such investment allocation election shall be made initially in the
Deferral Notice and shall be subject to such rules as the Board may
prescribe, including, without limitation, rules concerning the manner
of making investment allocation elections and the frequency and timing
of changing such investment allocation elections.
The Company shall change, add or eliminate the investment options
provided hereunder from time to time to conform to those then available
under the Employee Deferral Plan. Each investment option, other than
the Prime Interest Rate Option and the 360 Communications Common Stock
Units Option, shall reflect the investment performance (including
deemed reinvestment of interest, dividends and other distributions of
the same mutual fund, investment index, or phantom portfolio as is then
being utilized for purposes of the corresponding investment option
under the Employee Deferral Plan. The Company may, but is under no
obligation to acquire any investment or otherwise set aside assets for
the deemed investment of Deferred Compensation Accounts hereunder. The
Company shall determine the amount and rate of investment gains or
losses with respect to any such investment option for any period, and
may take into account deemed expenses which would be incurred if actual
investments were made.
(e) Change of Investment Election. Effective as of any March 1, May 1,
August 1, November 1 (or if the New York Stock Exchange is not open for trading
on such day, the close of the last business day of the prior month on which the
New York Stock Exchange was open for trading) a Participant may elect by a
written notice delivered to the Vice President, Human Resources no later than
the 15th day of the prior calendar month, to transfer all or any portion of his
or her deemed investment and/or change the manner in which his or her future
deferrals are deemed invested among the then-available investment options,
except that any transfer to or from the 360 Communications Common Stock Units
Option is subject to the prior approval of the General Counsel of the Company.
(f) Vesting of Deferred Compensation Accounts. A Participant shall be
100% vested in the value of his or her Deferred Compensation Account at all
times.
(g) Distribution Elections. At the time a Participant makes a deferral
election pursuant to Section 7(a), the Participant shall also include in the
Deferral Notice a written election (a "Distribution Election") with respect to
the following:
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(i) whether the distribution to such Participant shall commence
(A) on the first business day of any calendar year specified by the Participant,
(B) immediately following the date the Participant ceases to be a director, or
(C) on the first business day of any calendar year following the calendar year
in which the Participant ceases to be a director; provided, that the amount of
any distribution pursuant to clause (A) of this Section 7(g)(i) that occurs
prior to the termination of the Participant's service as a member of the Board
shall not exceed the aggregate amount of the Participant's deferrals under the
Plan (without taking into account any deemed earnings, interest or dividends
thereon) and the balance, if any, of such Participant's Deferred Compensation
Account shall be distributed as soon as practicable after such termination of
the Participant's service; and
(ii) whether such distribution shall be in one lump sum payment
or in such number of annual installments (not to exceed ten) as the Participant
may designate.
The Distribution Election may be modified in accordance with the procedures set
forth in Section 7(b); provided that any such modification shall be effective
with respect to only distributions relating to deferrals of Annual Retainer or
Chairman's Retainer for services rendered in the year or years after the year in
which the Distribution Election is modified.
(h) Manner of Plan Distributions. Each distribution to or for the
account of a Participant from the Deferred Compensation Account shall be made in
accordance with the Distribution Election made by such Participant in accordance
with Section 7(g) and shall be paid in cash; provided, however, that if a
Participant elected a distribution in accordance with Section 7(g)(i)(A) and the
year of such Participant's termination of service on the Board occurs prior to
the year designated pursuant to Section 7(g)(i)(A), the entire value of the
Participant's Deferred Compensation Account shall be distributed in the year of
such termination of service. If a Participant has failed to specify a
commencement date for a distribution in accordance with Section 7(g), such
distribution shall commence on the first business day of the calendar year
immediately following the year in which the Participant ceases to be a director.
If a Participant has failed to specify in accordance with Section 7(g) that a
distribution shall be made in a lump-sum payment or a number of installments,
such distribution shall be made in a lump-sum payment. In the case of any
distribution being made in annual installments, each installment after the first
installment shall be paid on the first business day of each subsequent calendar
year until the entire amount subject to such installment Distribution Election
shall have been paid.
8. TRANSFERABILITY OF AWARDS
(a) No Award shall be transferable by the Participant otherwise than by
will or under the applicable laws of descent and distribution, except that a
Participant may, in a manner specified by the Board, (i) designate in writing a
beneficiary to exercise an Option after the Participant's death, (ii) transfer
an Option to a revocable inter vivos trust as to which the Participant is both
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the settlor and trustee or co-trustee, or (iii) transfer an Option for no
consideration to a Permissible Transferee. The term "Permissible Transferee"
means any member of the Immediate Family of the Participant, any trust of which
all of the primary beneficiaries are members of the Immediate Family of a
Participant (a "Family Trust"), or any partnership of which all of the partners
are members of the Immediate Family of a Participant or Family Trusts. The
written instrument to be used in connection with any such transfer or
beneficiary designation shall be subject to the prior approval of the Board. The
term "Immediate Family" means a Participant's spouse, children, stepchildren,
grandchildren, parents, stepparents, siblings, grandparents nieces and nephews.
(b) Following the transfer of an Option to a Permissible Transferee,
the Permissible Transferee shall have all of the rights and obligations of the
Participant to whom the Option was granted and such Participant shall not retain
any rights with respect to the transferred option, except that (i) the payment
of any tax attributable to the exercise of the Option shall remain the
obligation of the Participant and (ii) the period during which the Option shall
become exercisable under Section 5(c)(ii) and shall remain exercisable under
Section 5(c)(iii) shall depend on the duration of the Participant's service as a
director.
(c) No Award shall be assigned, negotiated, or pledged in any way
(whether by operation of law or otherwise) except as permitted by Section 8(a),
and no Award shall be subject to execution, attachment or similar process.
9. EFFECTIVENESS, TERMINATION AND AMENDMENT
(a) The Plan shall become effective on the Effective Date and shall
terminate at the close of business of December 31, 2005, unless sooner
terminated pursuant to paragraph (b) below; provided that amounts elected prior
to December 31, 2005 to be deferred shall continue to be deferred in accordance
with the terms of the Plan. No Award shall be granted under the Plan after
December 31, 2005, provided that all Options granted before such date shall
remain outstanding in accordance with the terms of the Plan and all Restricted
Stock Awards then outstanding shall remain subject to Section 6.
(b) The Board at any time or from time to time may amend or terminate
the Plan without the approval of the shareowners of the Company; provided that
(i) any amendment of the Plan shall be subject to the approval of the
shareowners of the Company to the extent that such approval is then required
under the listing requirements of any securities exchange on which the Common
Stock is then listed and (ii) no termination, amendment or modification of the
Plan may, without the consent of a Participant, impair the rights and
obligations of such Participant arising under any then-outstanding Award.
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10. GENERAL PROVISIONS
(a) No Right to Remain as a Director. The existence of Plan shall not
obligate the Company to retain any Participant as a director nor shall it
obligate any Participant to remain as a director of the Company; provided that,
by accepting any Award, a Participant shall represent to the Company that it is
the Participant's good faith intention to continue to serve as a director of the
Company until the next Annual Meeting.
(b) Investment Representation; Registration. If the Board determines
that the law so requires, the holder of Options or a Restricted Stock Award
shall, upon any exercise of the Options or the grant of the Restricted Stock
Award, as applicable, execute and deliver to the Company a written statement, in
form satisfactory to the Company, representing and warranting that he or she is
purchasing or accepting the Shares then acquired for his or her own account and
not with a view to the resale or distribution thereof, that any subsequent offer
for sale or sale of any such Shares shall be made either pursuant to (i) an
effective registration statement under the Securities Act, or (ii) an exemption
from the registration requirements of such Act, as provided in a favorable
written opinion from counsel approved by the Company as to the availability of
such exemption.
(c) No Right to Specific Assets. Nothing contained in the Plan and no
action taken pursuant to the Plan (including the grant of any Award) shall
create a trust of any kind or any fiduciary relationship between the Company and
any Participant, the executor, administrator or other personal representative or
Beneficiary of such Participant, or any other persons; provided, however, that
the Company may at any time establish one or more trusts to pay benefits under
the Plan; provided, further, that to the extent that payments are made from such
trust, such payments will satisfy the Company's obligations under the Plan. To
the extent that any Participant or his or her executor, administrator, or other
personal representative, as the case may be, acquires a right to receive any
payment from the Company pursuant to the Plan, such right shall be no greater
than the right of an unsecured general creditor of the Company.
(d) Rights as a Shareowner. A Participant shall have no rights as a
shareowner of the Company with respect to any Shares covered by an Option until
he or she shall have exercised such Option.
(e) Non-Exclusivity. The adoption of the Plan shall not limit the power
of the Board to adopt any other incentive arrangements it may deem desirable
otherwise than under the Plan.
(f) Legends. Certificates for Shares issued upon pursuant to the Plan
shall bear such legend or legends as the Company, in its discretion, determines
to be necessary or appropriate to prevent a violation of, or to perfect an
exemption from, the registration requirements of the Securities Act.
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(g) Necessary Approvals. If at any time the Board shall determine in
its discretion that the listing, registration or qualification of the Shares
covered by the Plan upon any national securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of, or in connection with, the sale of
Shares under the Plan, no Shares will be delivered unless and until such
listing, registration, qualification, consent or approval shall have been
effected or obtained, or otherwise provided for, free of any conditions not
acceptable to the Board.
(h) Withholding Taxes. The Company shall have the right to make such
provisions as it deems necessary or appropriate to satisfy any obligations it
may have to withhold federal, state or local income or other taxes in connection
with the exercise of any Option or the grant of, or lapse of restrictions
applicable to, any Restricted Stock Award. In lieu thereof, the Company shall
have the right to withhold the amount of such taxes from any other sums due or
to become due from the Company to the Participant upon such terms and conditions
as the Board may prescribe.
(i) Severability. If any part f the Plan is declared by any court or
governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not invalidate any other part of the Plan. Any Section or part
of a Section so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such Section or
part of a Section to the fullest extent possible while remaining lawful and
valid.
(j) Headings and Captions. The headings and captions herein are
provided for reference and convenience only, shall not be considered part of the
Plan, and shall not be employed in the construction of the Plan.
(k) Controlling Law. The Plan shall be construed and enforced according
to the laws of the State of Delaware, excluding the conflict of laws principles
thereof.
360 COMMUNICATIONS COMPANY
Signed: /s/ Debra L. Ferrari Dated: ____________
Debra L. Ferrari
Title: Vice President - Human Resources
15
First Amendment to Employment Agreement for Dennis E. Foster
This First Amendment to Employment Agreement ("Amendment") is made,
entered into, and is effective as of this 10th day of December, 1997, between
360 Communications Company, a Delaware corporation (the "Company"), and Dennis
E. Foster ("Executive").
WHEREAS, the Company and Executive have entered into that certain
Employment Agreement dated March 9, 1996 (the "Agreement"); and
WHEREAS, the Company and Executive have reached agreement concerning
the modification of certain terms and conditions of Executive's continued
employment and wish to formalize that agreement;
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements of the parties set forth in this Amendment, and of
other good and valuable consideration the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
I.
Section 6.5 of the Agreement is amended by (A) deleting the second
sentence of the first paragraph of such Section, (B) deleting from clause (ii)
of the second paragraph of such Section the phrase "and which act or inaction is
not remedied within fifteen (15) business days of Executive's receipt of written
notice from the Company which describes the act or inaction", and (C) adding a
new final paragraph to such Section to read as follows:
A termination of Executive's employment shall not be deemed to
be for Cause unless each of the following conditions is satisfied:
(v) Written notice is provided to Executive not less
than 15 days prior to the date of termination setting forth
the Company's intention to consider terminating Executive,
including a statement of the intended date of termination and
a detailed description of the specific facts that the Company
believes to constitute Cause;
(w) None of the acts or omissions of Executive which
the Company believes to constitute Cause shall have occurred
more than 12 months before the earliest date on which any
member of the Board who is not a party to the act or omission,
knew or should have known of such act or omission;
<PAGE>
(x) Executive is offered an opportunity to respond to
such statement by appearing in person, together with
Executive's legal counsel, before the Board prior to the date
of termination;
(y) By the affirmative vote of at least 75% of the
non-employee members of the Board, the Board determines that
the specified actions of Executive constituted Cause and that
Executive's employment should accordingly be terminated for
Cause; and
(z) The Company provides Executive a copy of the
Board's written determination setting forth in full
specificity the basis of such termination for Cause.
By determination of the Board, the Company may suspend Executive from
his duties for a period of up to 30 days with full pay and benefits
hereunder during the period of time in which the Board is making a
determination as to whether to terminate Executive for Cause. Any
purported termination for Cause by the Company which does not satisfy
each substantive and procedural requirement of this definition shall be
treated for all purposes under this Agreement as a termination by the
Company without Cause.
II.
Section 7.4 of the Agreement is amended by (A) deleting from clause (c)
of the first paragraph of such Section the following phrase:
; provided, however, that for the purposes of this Paragraph the votes
of all Section 16 Persons shall be disregarded in determining whether
stockholder approval has been obtained
(B) deleting from the second paragraph of such Section all references to
"Section 16 Person" and substituting therefor the word "person", and (C)
deleting from the third paragraph of such Section the definition of "Section 16
Person."
III.
Section 9.1 of the Agreement is amended by adding the following before
the period at the end of the third paragraph of such Section:
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<PAGE>
, whether or not Executive prevails in such litigation or arbitration.
The Company shall pay (or reimburse Executive for) such fees and
expenses on a monthly basis within 10 days after Executive's submission
of a written request for payment or reimbursement, as applicable,
together with reasonable evidence that the fees and expenses were
incurred. If Executive does not prevail (after exhaustion of all
available judicial or arbitral remedies, as applicable), and a court of
competent jurisdiction decides that Executive had no reasonable basis
for bringing an action or arbitration hereunder or lacked good faith in
doing so, no further reimbursement for legal fees and expenses shall be
due to Executive, and Executive shall repay the Company for any amounts
previously paid by it hereunder pursuant to this Section 9.1.
V.
Except as amended herein, the Agreement remains in full force and
effect.
IN WITNESS WHEREOF, Executive and the Company have executed this
Amendment as of the date first written above.
ATTEST: 360 COMMUNICATIONS COMPANY
By: By:
Corporate Secretary Chairman of the Board of Directors
EXECUTIVE:
Dennis E. Foster
Amended and Restated Change-In-Control Severance Agreement
This CHANGE-IN-CONTROL SEVERANCE AGREEMENT dated as of January 6, 1997
(the "Effective Date"), and as amended and restated as of December ___, 1997 (as
so amended and restated, the "Agreement"), is made between 360 Communications
Company, a Delaware corporation having its principal offices at 8725 Higgins
Road, Chicago, Illinois (the "Company"), and 1 ("Executive").
Recitals
A. Executive is a key executive of the Company and an integral part of
its management.
B. The Company recognizes that the possibility of a change in control
of the Company may result in the departure or distraction of management to the
detriment of the Company and its shareowners.
C. The Company wishes to assure Executive of certain benefits should
Executive's employment terminate following a change in control of the Company.
D. The Company and Executive entered into that certain
Change-in-control Severance Agreement dated January 6, 1997 (the "Existing
Agreement") and desire to amend and restate such original Agreement in its
entirety as set forth below.
In consideration of the foregoing and the mutual covenants contained in
this Agreement, the Company and Executive agree to amend and restate the
Original Agreement as follows:
Agreement
Section 1. Definitions. The following terms shall have the meanings indicated
below:
"Base Salary" means the amount of compensation as determined by the
Board or the Compensation Committee for the calendar year during which a
Qualifying Termination occurs.
"Beneficiary" means, except where otherwise required by the Employee
Retirement Income Security Act of 1974 or the terms of an applicable employee
benefit plan, the person or persons designated by Executive, in a writing
provided to the Company prior to Executive's death, to receive amounts payable
to Executive under this Agreement. Subject to such exception, in the absence of
such a written beneficiary designation, the Beneficiary shall be Executive's
surviving spouse, or if none, Executive's estate.
"Board" means the Board of Directors of the Company.
-1-
<PAGE>
"Cause" means the occurrence of any one or more of the following as
determined in the good faith and reasonable judgment of the Board:
(i) Executive's conviction for committing an act of fraud,
embezzlement, theft, or any other act constituting a felony involving
moral turpitude or causing material harm, financial or otherwise, to
the Company,
(ii) a demonstrably willful and deliberate act or failure to
act which is committed in bad faith, without reasonable belief that
such action or inaction is in the best interests of the Company, which
causes material harm, financial or otherwise, to the Company, or
(iii) the consistent gross neglect of duties, or wanton
negligence by Executive in the performance of Executive's duties under
this Agreement.
A termination of Executive's employment shall not be deemed to be for Cause
unless each of the following conditions is satisfied:
(v) Written notice is provided to Executive not less than 15
days prior to the date of termination setting forth the Company's
intention to consider terminating Executive, including a statement of
the intended date of termination and a detailed description of the
specific facts that the Company believes to constitute Cause;
(w) None of the acts or omissions of Executive which the
Company believes to constitute Cause shall have occurred more than 12
months before the earliest date on which any member of the Board who is
not a party to the act or omission, knew or should have known of such
act or omission;
(x) Executive is offered an opportunity to respond to such
statement by appearing in person, together with Executive's legal
counsel, before the Board prior to the date of termination;
(y) By the affirmative vote of at least 75% of the
non-employee members of the Board, the Board determines that the
specified actions of Executive constituted Cause and that Executive's
employment should accordingly be terminated for Cause; and
(z) The Company provides Executive a copy of the Board's
written determination setting forth in full specificity the basis of
such termination for Cause.
By determination of the Board, the Company may suspend Executive from his duties
for a period of up to 30 days with full pay and benefits hereunder during the
period of time in which the Board is making a determination as to whether to
terminate Executive for Cause. Any purported termination for Cause by the
Company which does not satisfy each substantive and procedural requirement of
this definition shall be treated for all purposes under this Agreement as a
termination by the Company without Cause.
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<PAGE>
"Change in Control" means the first to occur of any one or more of the
following:
(i) the acquisition or holding by any person, entity or
"group" (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act), other than by the Company, any Subsidiary or any
employee benefit plan of the Company or a Subsidiary, of beneficial
ownership (within the meaning of Rule 13d-3 under the Exchange Act) of
30% or more of the then-outstanding common stock of the Company
("Common Stock") or the then-outstanding Voting Power of the Company;
provided, however, that no Change in Control shall occur solely by
reason of any such acquisition by a corporation with respect to which,
after such acquisition, more than 60% of both the then-outstanding
common shares and the then-outstanding Voting Power of such corporation
are then-beneficially owned, directly or indirectly, by the persons who
were the beneficial owners of the Common Stock immediately before such
acquisition, in substantially the same proportions as their respective
ownership, immediately before such acquisition, of the then-outstanding
Common Stock and Voting Power of the Company; or
(ii) individuals who, as of the Effective Date, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided that any individual who becomes
a director after the Effective Date whose election or nomination for
election by the Company's stockholders was approved by at least a
majority of the Incumbent Board (other than an election or nomination
of an individual whose initial assumption of office is in connection
with an actual or threatened "election contest" relating to the
election of the directors of the Company (as such terms are used in
Rule 14a-11 under the Exchange Act)) shall be deemed to be members of
the Incumbent Board; or
(iii) approval by the stockholders of the Company of (1) a
merger, reorganization or consolidation (an "Extraordinary
Transaction") with respect to which persons who were the respective
beneficial owners of the Common Stock immediately before such
Extraordinary Transaction would not, if such Extraordinary Transaction
were to be consummated immediately after such stockholder approval (but
otherwise in accordance with the terms presented in writing to the
stockholders of the Company for their approval), beneficially own,
directly or indirectly, more than 60% of both the then-outstanding
common shares and the then-outstanding Voting Power of the corporation
resulting from such Extraordinary Transaction, in substantially the
same proportions as their respective ownership, immediately before such
Extraordinary Transaction, of the then-outstanding Common Stock and
Voting Power of the Company, (2) a liquidation or dissolution of the
Company or (3) the sale or other disposition of all or substantially
all of the assets of the Company in one transaction or a series of
related transactions.
Notwithstanding the foregoing, a Change in Control will not occur with respect
to any person who is, by agreement or understanding (written or otherwise), a
participant on such person's own behalf in a transaction which causes the Change
in Control to occur.
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<PAGE>
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" has the meaning specified in the introductory paragraph of
this Agreement.
"Compensation Committee" means the Compensation Committee of the Board
(or such other committee of the Board that may be responsible for executive
compensation).
"Continuation Period" has the meaning specified in Section 2.1(b).
"Effective Date" has the meaning specified in the introductory
paragraph of this Agreement.
"Excess Parachute Payment" has the meaning specified in Section 280G of
the Code.
"Exchange Act" means the Securities Exchange Act of 1934.
"Excise Tax" has the meaning specified in Section 2.2.
"Executive" has the meaning specified in the introductory paragraph of
this Agreement.
"Good Reason" shall mean the occurrence, without Executive's prior
written consent, of any one or more of the following:
(i) the assignment to Executive of any duties which result in
a material adverse change in Executive's position (including status,
offices, titles, and reporting requirements), authority, duties, or
other responsibilities with the Company, or any other action of the
Company which results in a material adverse change in such position,
authority, duties, or responsibilities, other than an insubstantial and
inadvertent action which is remedied by the Company promptly after
receipt of notice thereof given by Executive,
(ii) any relocation of Executive of more than 35 miles from
the place where Executive was located at the time of the Change in
Control, or
(iii) a material reduction or elimination of any component of
Executive's rate of compensation, including (x) Base Salary, (y) the
annual incentive payment or (z) benefits or perquisites which Executive
was receiving immediately prior to a Change in Control.
"including" means including without limitation.
"IRS" means the Internal Revenue Service.
"Qualifying Termination" means the occurrence of any one or more of the
following:
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<PAGE>
(i) The Company's termination of Executive's employment other
than for Cause within 30 days prior to a Change in Control or within 24
months following a Change in Control;
(ii) Executive's voluntary termination of employment for Good
Reason within 30 days prior to a Change in Control or within 24 months
following a Change in Control;
(iii) Executive's voluntary termination of employment at any
time (whether or not for Good Reason) during the 30-day period which
begins on the first anniversary of a Change in Control; or
(iv) A successor of the Company fails to assume expressly the
Company's entire obligations under this Agreement prior to becoming
such a successor as required by Section 4.1(b).
A Qualifying Termination shall not include a termination of Executive's
employment by reason of death, disability, Executive's voluntary termination
other than for Good Reason (except as provided in clause (iii) of the
immediately preceding sentence), or the Company's termination of Executive's
employment for Cause.
"Section" shall, unless the context otherwise requires, mean a section
of this Agreement.
"Subsidiary" means a United States or foreign corporation with respect
to which the Company owns, directly or indirectly, 50% or more of the
then-outstanding common stock.
"Voting Power" means the combined voting power of the then-outstanding
securities of a corporation entitled to vote generally in the election of
directors.
Section 2. Employment Termination
2.1. Benefits Payable. In the event Executive has a Qualifying
Termination, the Company shall provide Executive all of the following severance
benefits ("Severance Benefits"):
(a) The Company shall pay to Executive each of the following:
(i) The accrued but unpaid portion, if any, of Executive's
Base Salary, annual incentive for the year prior to the year in which
Executive's Qualifying Termination occurred (but actually earned,
vacation pay, unreimbursed business expenses, and all other items
earned by Executive on or before the date of the Qualifying Termination
(in full satisfaction for these amounts owed to Executive).
(ii) A pro-rated incentive equal to:
(x) Executive's full annual target incentive,
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<PAGE>
multiplied by
(y) a fraction, the numerator of which is the number
of calendar months (counting a partial calendar month as a
full month) that have elapsed (in the calendar year in which
Executive's effective date of termination occurs) prior to
Executive's effective date of termination, and the denominator
of which is 12.
(iii) Three times Executive's Base Salary in effect upon the
date of the Qualifying Termination or, if greater, three times
Executive's Base Salary in effect immediately prior to the occurrence
of the Change in Control.
(iv) Three times Executive's then-current target incentive
opportunity established under the Company's annual incentive plan for
the year in which the Qualifying Termination occurs (or, if no such
incentive opportunity has yet been established for such year, such
incentive opportunity established for the immediately preceding year)
or, if greater, three times Executive's target incentive opportunity in
effect immediately prior to the occurrence of the Change in Control.
(v) Payment or reimbursement (at Executive's option) for
outplacement services, of a scope and nature customary for executives
holding comparable positions and provided by a nationally-recognized
outplacement firm of Executive's selection, for a period of up to two
years commencing on the date of Executive's Qualifying Termination.
Notwithstanding the foregoing, the aggregate amount of such
reimbursement shall not exceed 25% of Executive's Base Salary as of the
date of the Qualifying Termination.
(vi) All other compensation and benefits to which Executive
has a vested right on the date of the Qualifying Termination, except to
the extent Executive elects to receive payment of such compensation at
a later date.
(b) The Company shall continue Executive's health benefit coverage (at
the same cost to Executive, and at the same coverage level, as in effect as of
the date of the Qualifying Termination) for 36 months from the date of the
Qualifying Termination (the "Continuation Period"). The required COBRA health
benefit continuation period shall begin concurrently with the start of this
benefit continuation period, subject to the following:
Except as otherwise required by COBRA, the providing of this
post-employment health benefit coverage by the Company shall be
discontinued prior to the end of the Continuation Period to the extent
that similar benefits are available to Executive from a subsequent
employer, as determined by the Board or the Compensation Committee in
the exercise of good faith and reasonable judgment, except that, to the
extent such subsequent coverage excludes (or would exclude) preexisting
conditions, such post-employment coverage shall be continued. Executive
shall from time to time promptly provide the Board written notice, in
reasonable detail, of the availability of health benefit coverage from
a subsequent employer.
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<PAGE>
(c) All of the Severance Benefits described in Section 2.1(a) shall be
paid in cash to Executive in a single lump sum as soon as possible after the
effective date of the Qualifying Termination (but in no event more than 10 days
after such date), except that the Severance Benefits described in Section
2.1(a)(v) shall be paid or reimbursed to Executive promptly following submission
of an invoice of the firm providing the outplacement services described in such
subsection. Executive shall not be obligated to seek other employment or take
any other action to mitigate the amounts payable to Executive under this
Agreement.
2.2. Excise Tax Payment. If any portion of the amounts payable under
Section 2.1, or under any other agreement with, or plan of the Company,
including stock options, restricted stock, or other long-term incentives would
constitute an Excess Parachute Payment, such that an excise tax is payable under
Section 4999 of the Code in respect of such amounts, then the Company shall pay
to Executive, in cash, an additional amount equal to such excise tax and any
interest or penalties incurred by Executive with respect thereto (collectively,
"Excise Tax"), together with any federal and state income, employment and other
excise taxes payable by Executive in respect of such payment (and to cover the
resulting income, employment, and other excise taxes resulting from each
successive payment, and so on as necessary to completely offset the Excise Tax
impact). For this purpose, Executive shall be deemed to be subject to the
highest marginal rate of federal and state taxes. This payment shall be made as
soon as possible following the date of Executive's Qualifying Termination, but
in no event later than 30 calendar days after such date.
2.3. Subsequent Recalculation of Excise Tax Payment. (a) In the event
it is finally determined by the IRS that the Excise Tax payable by Executive is
greater than the amount computed pursuant to Section 2.2, the Company shall
reimburse Executive for any additional amount necessary to make Executive whole
(less any amounts received by Executive that Executive would not have received
had the computations initially been computed as subsequently adjusted),
including the value of any underpaid Excise Tax due to the IRS.
(b) In the event it is finally determined by the IRS that the Excise
Tax payable by Executive is less than the amount computed pursuant to Section
2.2, Executive shall promptly reimburse the Company for any amounts Executive
received pursuant to Section 2.2 in excess of the amount necessary to offset all
of the Excise Tax impact, including the value of any excise, income and
employment taxes. If Executive fails promptly to so reimburse the Company, the
Company, in addition to any other remedies available to it, shall be entitled to
reduce the amount of any payments due Executive by the amount required to be so
reimbursed.
(c) Each party shall promptly give the other notice of any IRS inquiry,
examination, claim or refund with respect to the applicability or amount of
Excise Tax payable by Executive, and the parties shall cooperate with each other
in resolving any issues thereon raised by the IRS.
Section 3. Term of Agreement
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<PAGE>
The initial term of this Agreement ("Initial Term") shall be until
December 31, 1998. The Initial Term shall automatically shall be extended for an
additional three-year term at the end of the Initial Term, and successively
thereafter for a three-year term after each such additional term (each, an
"Additional Term"), unless the Company or Executive shall deliver to the other
party written notice of intent not to extend such this Agreement, delivered at
least six months before the end of the Initial Term or the Additional Term then
in effect. In the event such notice is properly delivered by either party, this
Agreement, along with all corresponding rights, duties, and covenants, shall
automatically expire at the end of the Initial Term or Additional Term then in
effect; provided, however, that if a Change in Control occurs during the Initial
Term or any Additional Term, then the term of this Agreement shall not expire
before the end of a two-year period commencing on the date of the Change in
Control.
Section 4. Assignment
4.1. Assignment by Company. (a) This Agreement shall be binding upon,
and shall inure to the benefit of, the Company and its successors. Any such
successor shall be deemed to be the Company for all purposes of this Agreement.
As used in this Agreement, the term "successor" shall mean any surviving
corporation in a merger or consolidation, or any person, corporation,
partnership, or other business entity which, whether by purchase or otherwise,
acquires all or substantially all of the assets of the Company. Notwithstanding
such assignment, the Company shall remain, with such successor, jointly and
severally liable for all its obligations hereunder. Without limiting the
generality of the foregoing, it is specifically agreed that an assignment of
this Agreement by the Company will not diminish Executive's rights under Section
2 hereof.
(b) The Company shall require any successor to assume expressly and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform if no such succession were to take
place.
(c) Except as provided in this Section, this Agreement may not be
assigned by the Company.
4.2. Assignment by Executive. This Agreement shall inure to the benefit
of and be enforceable by Executive's personal or legal representatives,
executors, and administrators, successors, heirs, distributees, devisees, and
legatees. If Executive should die while any amounts payable to Executive under
this Agreement remain outstanding, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to the
Beneficiary.
Section 5. Dispute Resolution and Notice
5.1. Dispute Resolution. (a) Executive shall have the right and option
to elect to have any good faith dispute or controversy arising under or in
connection with this Agreement settled by litigation or by arbitration. If
arbitration is selected, such proceeding shall be conducted before a panel of
three arbitrators sitting in a location selected by Executive within 50 miles
from the location of Executive's principal place of employment, in accordance
with the rules of the American Arbitration Association then in effect. Judgment
may be entered on the award of the arbitrator in any court having jurisdiction.
-8-
<PAGE>
(b) All expenses of such litigation or arbitration, including but not
limited to the reasonable fees and expenses of the legal representative for
Executive, and necessary costs and disbursements incurred as a result of such
dispute or legal proceeding, and any prejudgment interest, shall be borne by the
Company, whether or not the Executive prevails in such litigation or
arbitration. The Company shall pay (or reimburse Executive for) such fees and
expenses on a monthly basis within 10 days after Executive's submission of a
written request for payment or reimbursement, as applicable, together with
reasonable evidence that the fees and expenses were incurred. If Executive does
not prevail (after exhaustion of all available judicial or arbitral remedies, as
applicable), and a court of competent jurisdiction decides that Executive had no
reasonable basis for bringing an action or arbitration hereunder or lacked good
faith in doing so, no further reimbursement for legal fees and expenses shall be
due to Executive, and Executive shall repay the Company for any amounts
previously paid by it hereunder pursuant to this Section 5.1.
5.2. Notice. Any notices or other communications provided for by this
Agreement shall be sufficient if in writing and sent by registered or certified
mail to Executive at the last address Executive has filed in writing with the
Company or, in the case of the Company, the Board, or the Compensation Committee
of the Board, at the Company's principal offices.
Section 6. Miscellaneous
6.1. Entire Agreement. This Agreement supersedes any prior agreements
or understandings, oral or written, between Executive and the Company, with
respect to the subject matter hereof and constitutes the entire agreement of the
parties with respect thereto. The captions of this Agreement are not part of the
provisions hereof and shall be of no effect.
6.2. Modification. This Agreement may not be terminated or in any way
amended except by a written agreement executed by the Company and Executive.
6.3. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
6.4. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same Agreement.
6.5. Tax Withholding. The Company may withhold from any amounts payable
under this Agreement all federal, state, city, or other taxes as may be required
pursuant to any law or governmental regulation or ruling.
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<PAGE>
6.6. Governing Law. To the extent not preempted by federal law, the
provisions of this Agreement shall be construed and enforced in accordance with
the laws of the State of Illinois, without reference to principles of conflict
of laws.
IN WITNESS WHEREOF, Executive and the Company have executed this
Agreement as of the date first above written.
ATTEST 360 COMMUNICATIONS COMPANY
By: By:
Kevin C. Gallagher Dennis E. Foster
Corporate Secretary President and Chief Executive Officer
EXECUTIVE:
1
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<TABLE>
EXHIBIT 12
360 COMMUNICATIONS COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
For the Year Ended December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Earnings
Income (loss) before
cumulative effects of
changes in
accounting principles $ 81,495 $ 59,519 $ (1,695) $ (19,757) $ (49,897)
Adjustment for minority
interest in majority
owned affiliates 50,880 46,622 34,269 22,110 9,697
Share of distributed
income of less-than
50%-owned affiliates
net of equity pick-up (22,903) (27,838) (7,206) (10,899) (10,466)
Adjustment for 50%-
owned affiliates (11,304) (10,327) (4,847) (4,966) (1,727)
Capitalized interest (2,425) (2,234) (1,553) (1,097) (712)
Income tax provision 73,829 57,829 25,405 5,697 (7,112)
------------ ----------- ----------- ----------- -----------
Subtotal 169,572 123,571 44,373 (8,912) (60,217)
Fixed charges
Interest charges 134,014 108,598 128,793 99,534 86,121
Interest portion of
operating rents 9,452 6,753 5,868 4,115 2,524
Adjustment for 50%-
owned affiliates 2,421 2,200 2,474 1,990 1,698
------------ ----------- ----------- ----------- -----------
Total fixed charges 145,887 117,551 137,135 105,639 90,343
------------ ----------- ----------- ----------- -----------
Earnings, as adjusted $ 315,459 $ 241,122 $ 181,508 $ 96,727 $ 30,126
============ =========== =========== =========== ===========
Ratio of earnings to fixed
charges 2.16 2.05 1.32
============ =========== ===========
- ------------
NOTE: The ratio of earnings to fixed charges have been computed by
dividing fixed charges into the sum of (a) income (loss) before
cumulative effects of changes in accounting principles, less
capitalized interest and with adjustments to appropriately reflect
the Company's majority-owned, 50%-owned, and less-than-50%-owned
affiliates, (b) income taxes, and (c) fixed charges. Fixed charges
consist of interest on all indebtedness and the interest component
of operating rents, with adjustments as appropriate to reflect the
Company's 50%-owned affiliates. For each of the two years in the
period ended December 31, 1994, the deficit of earnings to fixed
charges was $8,912,000 and $60,217,000,
</TABLE>
SUBSIDIARIES OF 360 COMMUNICATIONS COMPANY
Percentage
of Voting
Securities
Jurisdiction of Owned by Its
Incorporation or Immediate
Name Organization Parent
- ---- ---------------- ------------
360 Communications Company of Alabama Delaware 100
Subsidiary:
--Pennsylvania RSA 12 Limited Partnership Delaware 33
--Susquehanna Cellular Communications Delaware 2
Limited Partnership
360 Communications Company of Charlottesville Virginia 100
360 Communications Company of Ft. Walton Beach Florida 30
Limited Partnership
360 Communications Company of Hickory North Carolina 3
Limited Partnership
360 Communications Company of Hickory No. 1 Delaware 100
Subsidiary:
--360 Communications Company of Hickory North Carolina 97
Limited Partnership
360 Communications Company of Indiana No. 1 Delaware 100
Subsidiary:
--Indiana RSA 2 Partnership Indiana 75
360 Communications Company of Iowa Delaware 100
Subsidiary:
--Waterloo MSA Limited Partnership Delaware 89
360 Communications Company of Missouri No. 1 Delaware 100
360 Communications Company of Nebraska Delaware 100
Subsidiaries:
--Kansas RSA 15 Limited Partnership Delaware 99
360 Communications Company of Nevada Nevada 72
Limited Partnership
360 Communications Company of New Mexico Delaware 100
360 Communications Company of North Carolina North Carolina 64
Limited Partnership
360 Communications Company of Ohio No. 1 Delaware 100
Subsidiary:
--Ohio RSA 2 Limited Partnership Delaware 67
360 Communications Company of Ohio No. 2 Delaware 100
Subsidiary:
--Ohio RSA 5 Limited Partnership Delaware 68
360 Communications Company of Ohio No. 3 Delaware 100
Subsidiary:
--Ohio Cellular RSA L.P. Illinois 17
--Ohio RSA 6 Limited Partnership Delaware 82
- 1 -
<PAGE>
Percentage
of Voting
Securities
Jurisdiction of Owned by Its
Incorporation or Immediate
Name Organization Parent
- ---- ---------------- ------------
360 Communications Company of Ohio No. 4 Delaware 100
Subsidiary:
--Kansas RSA 15 Limited Partnership Delaware 1
--Ohio Cellular RSA L.P. Illinois 83
360 Communications Company of Peoria Illinois 100
360 Communications Company of Pennsylvania No. 1 Delaware 100
Subsidiary:
--Cellular Plus L.P. Illinois 18
Subsidiary:
--Williamsport/PA-8 Cellular Limited Illinois 69
Partnership
Subsidiaries:
--Pennsylvania RSA 1 Limited Partnership Delaware 80
--Pennsylvania RSA No. 6(I) Limited Delaware 57
Partnership
--Pennsylvania RSA No. 10B(I) Limited Delaware 67
Partnership
360 Communications Company of Pennsylvania No. 2 Delaware 100
Subsidiary:
--Cellular Plus L.P. Illinois 82
--Pennsylvania RSA 12 Limited Partnership Delaware 67
360 Communications Company of Pennsylvania No. 3 Delaware 100
360 Communications Company of South Delaware 100
Carolina No. 1
360 Communications Company of Tennessee No. 1 Delaware 100
Subsidiary:
--Tennessee RSA 8 Limited Partnership Delaware 50
360 Communications Company of Tennessee No. 2 Delaware 100
360 Communications Company of Texas Texas 67
Limited Partnership
360 Communications Company of Texas No. 1 Delaware 100
Subsidiary:
--Texas RSA 7B2 Limited Partnership Delaware 98
360 Communications Company of Texas No. 2 Delaware 100
Subsidiary:
--Texas RSA #10B2 Limited Partnership Delaware 75
360 Communications Company of Texas No. 3 Delaware 100
360 Communications Company of Virginia Virginia 100
Subsidiaries:
--360 Communications Company of Lynchburg Virginia 100
--360 Communications Company of Danville Virginia 75
Limited Partnership
--Virginia RSA 1 Limited Partnership Delaware 5
- 2 -
<PAGE>
Percentage
of Voting
Securities
Jurisdiction of Owned by Its
Incorporation or Immediate
Name Organization Parent
- ---- ---------------- ------------
360 Communications Company of Virginia No. 1 Delaware 100
Subsidiaries:
--Virginia RSA 1 Limited Partnership Delaware 95
--Virginia RSA 2 Limited Partnership Delaware 67
360 Communications Investment Company Delaware 100
Subsidiaries:
--Centel Cellular Company of Laredo Delaware 100
--360 Communications Company of Petersburg Virginia 100
Subsidiaries:
--Petersburg Cellular Partnership Delaware 23
--Petersburg Cellular Telephone
Company, Inc. Virginia 100
Subsidiary:
--Petersburg Cellular Partnership Delaware 51
360 Communications Investment Company Delaware 100
of Delaware
Subsidiary:
--360 Communications Company of Florida Delaware 100
Subsidiaries:
--360 Communications Company of Florida 70
Ft. Walton Beach Limited Partnership
--360 Communications Investment Delaware 100
Company of Florida
Subsidiary:
--360 Communications Company of Delaware 100
North Carolina No. 1
Subsidiary:
--North Carolina RSA 6 Limited Partnership Delaware 88
Subsidiary:
--360 Communications Company of South Delaware 100
Carolina No. 2
Subsidiaries:
--South Carolina RSA No. 2 South Carolina 50
Cellular General Partnership
--South Carolina RSA No. 4 South Carolina 50
Cellular General Partnership
--South Carolina RSA No. 5 South Carolina 50
Cellular General Partnership
--South Carolina RSA No. 6 South Carolina 50
Cellular General Partnership
--South Carolina RSA No. 8 South Carolina 50
Cellular General Partnership
360 Communications Investment Company of North Carolina 100
Greensboro
Subsidiary:
--360 Communications Company of North North Carolina 5
Carolina Limited Partnership
360 Long Distance, Inc. Iowa 100
360 Paging, Inc. Delaware 100
360 Telephone Company of North Carolina Delaware 100
Dubuque MSA Limited Partnership Delaware 85
Full Circle Insurance Limited Bermuda 100
- 3 -
<PAGE>
Percentage
of Voting
Securities
Jurisdiction of Owned by Its
Incorporation or Immediate
Name Organization Parent
- ---- ---------------- ------------
North Carolina RSA 6 Limited Partnership Delaware 12
North Carolina RSA 15 North Sector North Carolina 67
Limited Partnership
Pennsylvania RSA No. 10B(I) Limited Partnership Delaware 33
South Bend/Mishawaka MSA Limited Partnership Delaware 16
TeleSpectrum, Inc. Kansas 100
Subsidiaries:
--Empire Cellular, Inc. Kansas 100
--TeleSpectrum of Virginia, Inc. Virginia 100
--Charleston-North Charleston MSA Limited Delaware 75
Partnership
--Greenville MSA Limited Partnership Delaware 89
--ICN-Charleston, West Virginia Limited West Virginia 85
Partnership
--Raleigh-Durham MSA Limited Partnership Delaware 92
--South Bend/Mishawaka MSA Limited Delaware 84
Partnership
--Susquehanna Cellular Communications Limited Delaware 98
Partnership
--Toledo MSA Limited Partnership Delaware 75
--Tyler/Longview/Marshall MSA Limited Delaware 60
Partnership
--Youngstown-Warren MSA Limited Partnership Delaware 97
Tennessee RSA 8 Limited Partnership Delaware 50
Texas RSA 9B3 Limited Partnership Texas 70
Texas RSA 10B4 Limited Partnership Texas 75
Virginia Metronet, Inc. Delaware 100
Subsidiaries:
--Northeast Pennsylvania SMSA Limited Delaware 79
Partnership
--Williamsport/PA-8 Cellular Limited Illinois 31
Partnership
Virginia RSA 2 Limited Partnership Delaware 5
- 4 -
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of 360 Communications Company and in the related prospectuses of our
report dated March 6, 1998, with respect to the consolidated financial
statements and schedule of 360 Communications Company and Subsidiaries included
in this Annual Report (Form 10-K) for the year ended December 31, 1997:
$500 Million Shelf Registration Form S-3 No. 333-21331
Retirement Savings Plan Form S-8 No. 333-1378
Replacement Stock Option Plan Form S-8 No. 333-1380
1996 Equity Incentive Program and Director
Equity and Deferred Compensation Form S-8 No. 333-1382
Employee Stock Purchase Plan Form S-8 No. 333-24251
Ernst & Young LLP
Chicago, Illinois
March 26, 1998
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of our
report herein dated February 13, 1998, with respect to the financial statements
of GTE Mobilnet of South Texas Limited Partnership for the years ended December
31, 1997 and 1996.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 27, 1998
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use of our report dated January 16, 1998, with respect to the
consolidated financial statements of Chicago SMSA Limited Partnership, included
in 360 Communications Company's Annual Report on Form 10-K for the year ended
December 31, 1997; such financial statements are not included separately in the
Form 10-K.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 27, 1998
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
360 Communications Company on Form S-3 (No. 333-21331), Form S-8 (No. 333-1380),
Form S-8 (No. 333-1382) of our report dated February 13, 1998, on our audits of
the financial statements of the New York SMSA Limited Partnership (the
"Partnership") as of and for the years ended December 31, 1997 and 1996, which
report is included in this Annual Report on Form 10-K
Coopers & Lybrand L.L.P.
New York, New York
March 26, 1998
Exhibit 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion of this Form 10-K of 360 Communications Company of
our report dated March 6, 1998 on our audit of the consolidated financial
statements of the Orlando SMSA Limited Partnership as of and for the year ended
December 31, 1997; such financial statements are not included separately in this
Form 10-K.
Coopers & Lybrand L.L.P.
Atlanta, Georgia
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA
FROM THE ANNUAL FINANCIAL STATEMENTS INCLUDED
AS PART OF 360'S 1997 10K
</LEGEND>
<CIK> 0001003959
<NAME> 360 COMMUNICATIONS COMPANY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,471
<SECURITIES> 0
<RECEIVABLES> 107,074
<ALLOWANCES> 6,602
<INVENTORY> 34,354
<CURRENT-ASSETS> 230,167
<PP&E> 1,750,097
<DEPRECIATION> 561,140
<TOTAL-ASSETS> 2,941,924
<CURRENT-LIABILITIES> 367,211
<BONDS> 1,825,347
0
0
<COMMON> 1,233
<OTHER-SE> 508,068
<TOTAL-LIABILITY-AND-EQUITY> 2,941,924
<SALES> 50,503
<TOTAL-REVENUES> 1,347,172
<CGS> 116,456
<TOTAL-COSTS> 158,309
<OTHER-EXPENSES> 255,263
<LOSS-PROVISION> 32,020
<INTEREST-EXPENSE> 131,589
<INCOME-PRETAX> 155,324
<INCOME-TAX> 73,829
<INCOME-CONTINUING> 81,495
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,495
<EPS-PRIMARY> 0.67
<EPS-DILUTED> 0.67
</TABLE>
